President Trump’s budget proposal has important implications for student loans, including the end of the Public Service Loan Forgiveness program and significant changes to federal student loan repayment plans.
Here’s what you need to know and how it can affect you.
The proposal would impact borrowers who borrow a new student loan starting July 1, 2019.
Therefore, if you borrow or have borrowed a student loan prior to that date, you would presumably be eligible for the program.
The Public Service Loan Forgiveness program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in an eligible federal, state or local public service job or 501(c)(3) non-profit job who make 120 eligible on-time payments over 10 years.
Nearly 750,000 borrowers have completed an employee certification form for the Public Service Loan Forgiveness program, which began in 2007 and requires 10 years of employment in a public service role.
Federal Student Loan Repayment
What if you are not working in public service and just want to repay your federal student loans through one of the existing federal student loan repayment plans?
The budget proposal seeks to combine the current income-driven federal repayments plans into a single student loan repayment plan – which is consistent with Trump’s proposal during his election campaign.
Today, the standard federal government student loan repayment period is 10 years.
Under the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) income-driven repayment plans, borrowers pay 10% of discretionary income each month toward their federal undergraduate student loans for 20 years, at which point any remaining balance on federal undergraduate student loans is forgiven.
Under REPAYE, for borrowers who have graduate school student loan debt, the repayment period is 25 years before the remaining student loan debt is forgiven.
Trump’s repayment plan would apply differently to undergraduate and graduate student loan borrowers.
For undergraduate student loan borrowers, monthly student loan payments would be capped at 12.5% of income. After 15 years of monthly payments, any remaining student loan debt would be forgiven. This is five years earlier than current income-driven repayment options for borrowers with undergraduate student loans.
While graduate student loan borrowers would have monthly student loan payments capped at 12.5% of income, student loan forgiveness would not occur until after 30 years (5 years later than the current repayment period under REPAYE).
How will student loan borrowers be impacted?
Here are some takeaways (among other changes to higher education funding):
Public Service Loan Forgiveness: Public servants would not be able to rely on Public Service Loan Forgiveness to have their student loans forgiven after 10 years. Alternatively, they could choose the proposed 15-year or 30-year repayment plan (depending on undergraduate or graduate student loans)
Federal Student Loan Repayment: A single student loan repayment plan may simplify the student loan repayment process. Undergraduate student loan borrowers could have their student loans forgiven after 15 years (five years sooner), which potentially can save interest costs for the borrower and eliminate student loan debt five years sooner than the current repayment plan. That means higher payments per month, but lower payments overall. However, graduate student loan borrowers could have their student loans forgiven after 30 years (five years later).
Subsidized Student Loans: The president’s budget also would eliminate subsidized student loans, which traditionally has meant that interest costs associated with a student loan were paid by the federal government while the borrower was in school. If subsidized loans are eliminated, the cost to attend college and graduate school could become more expensive due to more interest costs.
Delinquent Borrowers: If you become delinquent on your student loans, the president’s budget will enable the U.S. Department of Education, in conjunction with the Internal Revenue Service to verify your income more readily.
Pell Grants: The budget proposal expands Pell Grants to be used for shorter academic courses and certificates.
Importantly, while the President proposes a budget, only Congress passes appropriation bills. Therefore, the president’s budget will face legislative scrutiny and not automatically become law. However, House Republicans are working on a legislative bill that encompasses similar proposals to the president’s budget.
Through student loan refinancing, borrowers can refinance high-interest student loan debt and potentially score a lower rate, saving thousands of dollars in interest over time. Those savings can then go toward extra payments to get out of debt even faster. Additionally, borrowers can select a longer term to obtain a lower monthly payment as well.