President Trump's Student Loan Plan. Trump Student Loan Forgiveness

Many student loan borrowers are wondering how Donald Trump’s plans for dealing with the student loan crisis will affect them going forward.  In addition, borrowers are also wondering how his choice for Secretary of Education, Betsy DeVos, will want to handle federal student loans in the future.  While being an outspoken advocate in many areas of education, she has yet to address the particular issue of student loans.

President Trump has already made some major changes to student loan forgiveness programs - and most people don't know it. Combine that with the future proposals rolled out by Education Secretary Betsy DeVos, and there could be an outcry around Trump student loan forgiveness.

Both of these are important questions that may finally be getting early answers.  Sadly, those answers are scary for a huge number of student loan borrowers.  Reports as of May 2017 are that Trump and DeVos’ initial education budget will seek to eliminate the Public Service Loan Forgiveness program which could cost student loan borrowers billions of dollars.  Trump and DeVos will likely seek to eliminate over $700 million in Perkins Loans and massively reduce the amount of work-study programs.

Trump’s Position on Student Loans

While Trump has been extremely vague about his plans for student loans if elected, here’s what we do know so far:

  • Trump has stated that he does not want the federal government profiting off of student loans any longer (and blames government for driving up tuition costs)
  • He thinks the Department of Education could “largely be eliminated,” but did not elaborate on how the $28 billion spent on Pell Grants for students would be affected
  • He wants to restructure student loans but says government “can’t forgive these loans” outright…
  • He wants to return student lending to private banks and away from the federal government (in order to improve salary data and allow students to make more informed decisions about whether the tuition costs are worth it)
  • Proposed tying student loan decisions to the borrower’s future job prospects, an assessment likely based on the student’s major
  • He wants to punish schools financially when their students fail to repay their loans, adding that he wants colleges themselves to have “skin in the game” and would be on the hook if too many of their former students defaulted on their loans
  • He wants colleges to set more stringent standards for who is admitted, denying access to those it deems unlikely to succeed

Trump Signs Budget Including $350m For Loan Forgiveness

In the spending bill passed by Congress in March 2018 to fund the government through September, Congress ignored many of the Trump administration’s budget proposals including doing away with the Public Service Loan Forgiveness Program. Instead, Congress allocated $350 million for the Department of Education to help borrowers with previously unqualified repayment plans gain student loan forgiveness, and President Trump signed it into law. The purpose of the PSLF was to entice graduates to take qualified public service jobs that served the community and to enable forgiveness of all student loan debt for those borrowers after 120 payments over 10 years into an income-driven repayment plan. To normally be eligible for forgiveness under PSLF, you must be on an income-driven repayment plan. The $350 million is earmarked for those who meet all qualifications but were paying into a graduated or extended repayment plan, which are not normally eligible. However, $350 million is unlikely to cover all who apply. This new program is known as the Expanded Temporary Public Service Loan Forgiveness program.

Based on what Trump has said so far, here are his other most concrete views:

  • Trump wants to consolidate all current repayment plans into a single Income-Based Repayment program (IBR). This would result in students paying 12.5% of their income toward their loans each month and receive total loan forgiveness after 15 years.
  • He has made plans to cover increased forgiveness amounts (and the higher cost to taxpayers) due to shorter repayment terms by lowering federal spending accordingly.
  • Trump promises to scale back funding significantly for the Department of Education.

How Trumps New Tax Cuts and Jobs Act Affects Students & Borrowers

On 12/22/2017, the Tax Cuts & Jobs Act was passed into law. Within the 429 page document, there are changes made to existing laws that would significantly affect current students, those with student loans, as well as parents who have dependents on their taxes currently in school.

Student Loan Discharges No Longer Taxable Income

Section 11031 of the Tax Cuts & Jobs Act modified student loan discharges through total & permanent disability(TPD) from being added to the borrowers gross income.  Under the new law, discharge student loans are no longer seen as taxable income if applying for disability discharge.  This is a hugely beneficial change for disabled borrowers who want to apply for discharge on their federal student loans.  Previously many borrowers elected not to apply for discharge and remained in an income-driven repayment plan.

Disabled borrowers were afraid to have their student loans discharged since they would see a hefty tax bill due at the end of the year, which was in many cases unmanageable.  This change made by the Trump administration comes as a huge relief to disabled federal student loan borrowers.
One big change presented in the Tax Cuts & Jobs Act is that interest deductions for student loans are being wiped out starting in 2018. Currently, if you are earning under $65,000/yr as a single, or $130,000/yr if you are married and filing jointly, you are eligible for an interest deduction on your student loans of up to $2,500.  IRS records show that in 2015 there were 13.4m people who claimed that deduction and the average deduction was $1,100.  For someone in the 25% tax bracket, that would translate to a reduced tax liability of $275.  It’s not a huge amount, but for a struggling individual out of college trying to make ends meet, every dollar matters.

Here are the other stances the Trump administration has taken:

  • The government “shouldn’t be making money on student loans”—the logical/only fix to this would be to lower the interest rate for federal loans going forward
  • Eliminate the Public Service Loan Forgiveness program (in favor of putting all borrowers into a single IBR)
  • Push colleges to cut tuition by reducing large administrative costs
  • Reduce federal regulations on colleges to reduce their compliance costs so they can pass those savings along to students
  • Universities will be required to spend all of their endowment money going forward on their students (instead of “hedge fund managers”) to keep tuition low and cut student debt or risk losing their federal tax breaks
  • Possible tax-exempt status for large university endowments if schools don’t start making their degrees more affordable for students

If he does change the IDR program as he has suggested, those interested in Income-Driven Repayment plans would have a higher monthly payment, BUT forgiveness would occur sooner.

Here are the big outstanding questions:

  • No mention of tax implications on forgiven student loan amounts
  • No mention of bankruptcy reforms

So how will this affect your student loans going forward? And more importantly, what should you do about it?

Graduate Tuition Waivers Will Be Taxed

Graduate students often take up jobs at their university in exchange for a tuition waiver.  These grads are often working on research, teaching in a classroom, and trying to earn their graduate degree at the same time.  The school will waive a portion of their tuition, most often into the many thousands of dollars for their work.  Currently, the IRS does not see that tuition waiver as taxable income.   Beginning in 2018, it would.  For a graduate who earns a $25,000 tuition waiver and is in the 12% tax bracket, this would result in a tax bill of $3,000 dollars, when they may not even have an actual income.  These are students working full time to earn that waiver but may not have any actual REAL income.

Lifetime Learning Credit Being Axed

The Lifetime Learning Credit is being repealed, which allows a credit offset of 20% on the first $10,000 of your education expenses.  This translates into a deduction of up to $2,000, which could be used for many years as you had education expenses. The big difference between the American Opportunity Tax Credit & the Lifetime Learning Credit is that the latter allows for deductions based on vocational expenses.  By removing this tax credit it is hurting those who are looking to improve their skill and gain useful hands-on training in a field that may not be available at a traditional university.

American Opportunity Tax Credit Improved

The American Opportunity Tax Credit has been improved by the Tax Cuts & Job Act.  This is one of the more popular deductions for student loans that allows up to a $2,500 deduction for qualified education expenses for the first 4 years of higher education. The IRS data show that 9m Americans applied for this tax credit last year.  The Tax Cuts & Jobs Act has increased the allowable deduction period to five years instead of four, but the fifth year is at a reduced $1,250 deduction.  The deduction is calculated as being 100% of the expenses incurred up to the first $2,000, and after that it’s 25% of the next $2,000 for a max of $2,500.

If Trump & DeVos take Public Service Loan Forgiveness away, what should borrowers do?

  • For borrowers that are eligible for PSLF, immediately ensure that your loans are in the Direct Loan Program (consolidate your loans as necessary)
  • If you are in the Direct program already (and eligible for PSLF) certify your employment status immediately.

These steps alone will not ensure that borrowers will receive PSLF, but being in the program prior to any law changes is likely to improve your chances of receiving it greatly.

Recommendations for Borrowers:

1) Trump is clearly in favor of a single IBR program going forward, which will have a shorter forgiveness period than the version currently in place. If you are in distress or default on your loans, enroll in a current Income-Driven Repayment program (or a loan rehabilitation). If you’re not, it may be best to wait and see what develops with Trump’s stated new version before you enroll. The shorter forgiveness period may end up saving you money over the long-term.

2) Make sure to stay current on your student loans payments and out of default status. This is important because, in the past, new student loan programs have been more difficult for those in default to enroll in. Keeping your loans in good standing is the best way to keep your opinions open going forward.

3) At this point, there is no real knowledge available about how Trump’s student loan policies will affect private loans, if at all. This being the case, it may be best to simply to wait and see what develops. This may offer an opportunity to take advantage of better options in the near future.

Obviously, there are still a lot of questions in the minds of student loan borrowers about how Trump’s future policies will affect them. Rest assured that as things develop, Student Debt Relief aims to provide student borrowers with the most up-to-date information and guidance.

Trump Student Loan Forgiveness Changes

How the Trump Administration is Changing Student Loan Forgiveness Plans

Let's first talk about some of the things that have changed under the Trump administration so far. These are changes that have already gone into effect - they are the law. However, remember these laws can always be changed in the future.

Since entering office in January 2017, President Donald Trump and Education Secretary Betsy DeVos have been two polarizing players in the US education system. DeVos initially attracted attention for her work to expand school vouchers, but reactions to the changing federal student loan forgiveness plans have lately been picking up steam. The administration has already made changes to federal loan forgiveness plans, but there are many more in the pipeline. So what are these changes, and how would they affect borrowers?

Stop Taxing Death and Disability Act. Tax Free Death And Disability Student Loan Discharge

We've discussed before in our article on secret ways to get student loan forgiveness that, unless you're in a qualifying program, most student loan forgiveness and student loan discharges are considered taxable income.

Section 11031 of the Tax Cuts & Jobs Act eliminated the taxability of student loan discharge on borrowers who get it for Death or Total and Permanent Disability. This is a common sense law that went into effect on January 1, 2018. This date is important to note, as any loans discharged in 2017 will still face taxes. This act will expire in 2025 if Congress does not renew it.

That means if were to get $50,000 in student loans forgiven, it is considered income.  If you made $35,000 working, your total income for the year would now be $85,000.  The result? A higher tax bill. Borrowers could see their tax bills rise by $10,000 or more!

To make matters worse, if you're getting your loans discharged due to total and permanent disability, this "income" could disqualify you from aid programs that you might rely on.

However, Trump tax plan, known as the Tax Cuts and Jobs Act, eliminated the taxability of student loan discharge on people who get it for Death or Total and Permanent Disability. That means, if you are getting student loans discharged on death or disability, you no longer will face a tax burden (or your family won't).

It's important to note that this provision only went into effect on January 1, 2018 - and so any loans discharged in 2017 will still face taxes. Furthermore, this provision is set to expire in 2025 unless Congress renews it.

Tuition And Fees Deduction Eliminated

The tuition and fees deduction has been eliminated under the Tax Cuts and Jobs Act. The tuition and fees deduction was actually an extender that expired at the end of 2016. The tuition and fees deduction allowed taxpayers to reduce their taxable income by up to $4,000.

The Tuition and Fees Deduction allowed taxpayers to reduce their taxable income by up to $4,000 for college tuition or related expensesThis deduction was actually scheduled to expire at the end of 2016, but it was instead extended for the 2017 tax year as a part of the Bipartisan Budget Act of 2018. This was a deduction generally claimed by those also claiming a Lifetime Learning Credit and higher earners.

However, while there were proposals to eliminate or change other education tax credits - such as the American Opportunity Tax Credit and the Lifetime Learning Tax Credit, those tax credits stay the same under the new law. However, there are income limits to these education tax credits, so the tuition and fees deduction provided some relief to high earner tax payers.

Trump Student Loan Forgiveness Proposals

There have been a lot of proposals that people have been concerned about with the Trump administration. It's important to note that none of these proposals are the law, but that doesn't mean they aren't changes the President wants to see.

Whether you're for or against these changes, you need to know what they are and what they could mean. Then you should voice your concerns to your representative in Congress.

Elimination Of Public Service Loan Forgiveness (PSLF)

President Trump, along with Betsy DeVos, have called for the elimination of Public Service Loan Forgiveness(PSLF) on several occasions. PSLF is one of the top ways to get student loan forgiveness in the United States.

Introduced by President George W. Bush in 2007, the PSLF program has been slated by the Trump administration for likely removal from the federal budget. The program currently rewards qualifying nonprofit and government workers who make 120 qualifying monthly payments (10 years) by wiping out the borrower’s remaining education debt at the end of that period.

Discontinuing the PSLF plan was first proposed for the 2018 budget. After being dropped from the final iteration, it was again included for 2019. Ending this program could deter borrowers from pursuing a career in public service, government, law enforcement, teaching, etc., instead opting for the private sector.

In March 2018, Congress allocated an additional $350 million on a first come, first serve basis for those who qualified for forgiveness in October 2017. This signals that while the future of the program might be uncertain, borrowers already enrolled may be grandfathered in if a change is made. In the current budget, the proposed changes would apply to new loans after July 1, 2019.

In his first budget proposal for 2018, he attempted to defund PSLF. This raised a series of legal questions (because whether there is money or not, it's still the law, so what would the Department of Education do), and eventually the proposal was dropped.

However, in his next budget for 2019, Trump has once again proposed eliminating Public Service Loan Forgiveness. 

It's important to note that the proposed changes would apply to new loans after July 1, 2019. So, it currently appears that those with existing loans would be grandfathered in.

Changes to loans would apply to borrowing after July 1, 2019, not including those loans provided to borrowers to finish their current education.

Elimination Of Subsidized Student Loans

Trump has also proposed the elimination of subsidized student loans in his 2019 budget proposal. Subsidized student loans provide student loan borrowers with significant assistance - with the government paying for interest accrued during school. This can result in significant savings for borrowers.

Also included in the 2019 budget proposal is the elimination of subsidized student loans. This would be a significant change for new borrowers. Currently, the government pays the interest accrued while the student is in school for federally subsidized loans.

Subsidized student loans are only available to borrowers who demonstrate financial need when filling out their FAFSA. There are still unsubsidized loans, but these are much more expensive in the long-run and students would graduate with more debt. According to a report by the Congressional Budget Office in December 2016, eliminating subsidized loans altogether would have added $26.8 billion in costs to students over 10 years.

The government issued 5.7 million subsidized student loans in the 2016-2017 school year. These loans go towards students with a financial need, based on filling out the FAFSA.

Eliminate Most Repayment Plans In Favor Of A Single Income-Driven Repayment Plan

President Trump has proposed the elimination of all the income-driven repayment plans (IBR, PAYE, RePAYE, ICR) and replace them with a single income-driven repayment plan.

Today there are four income-driven repayment plans:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

The Trump administration has proposed eliminating these plans, replacing them with a single income-driven repayment plan. Currently, each plan has a different timeline and rate for the borrower to pick what fits their financial situation best.

The proposed single option would cap a borrower’s monthly payment at 12.5% of their discretionary income. Undergraduate and graduate borrowers would be on 15- and 30-year timeline respectively for student loan forgiveness.

Some IBR and ICR borrowers currently pay 15 to 20% of their discretionary income as a part of their plan, so this would benefit those borrowers. However, other income-driven repayment borrowers are only required to pay 10% at this time. Undergraduates might also prefer the 15-year timeline, but 30-years for graduates is longer than any of the four existing plan timelines.

This new repayment plan would cap borrower's monthly payment at 12.5% of their discretionary income. It would also provide for student loan forgiveness at 15 years for undergraduate borrowers, and 30 years for graduate borrowers.

Trump has made comments that he would like the government to cover the cost of student loan forgiveness under his new plan - which leads us to believe that it would be tax free student loan forgiveness. However, this has not been clarified, and it would be different than the current existing income-driven repayment plan programs. 

Allow Student Loans To Be Discharged In Bankruptcy

This proposal comes from the Department of Education, which announced that it was seeking comments on how to determine "undue hardship" to allow student loans to be discharged in bankruptcy.

As of 1998, student loans are exceptionally more difficult to discharge in bankruptcy. The borrower has to prove “undue hardship” to even consider it. Even the term “undue hardship” has not been well defined, so borrowers are not sure where to start and give up on bankruptcy as an option.

In February 2018, the Department of Education posted a Request for Information on Evaluating Undue Hardship Claims in Adversary Actions Seeking Student Loan Discharge in Bankruptcy Proceedings. Basically a call to the public for comments on “factors to be considered in evaluating undue hardship claims” when considering bankruptcy.

Further clarity would be beneficial in the long-term. The uncertainty until these rules are set may make lenders less willing to lend and take on riskier borrowers.

It's important to know the history of this. Before 1998, student loans could be discharged in bankruptcy after the seventh year of repayment. However, after 1998, student loans were prohibited from being discharged in bankruptcy except in cases of "undue hardship" 

However, Congress never defined what undue hardship meant, and so the courts have taken it upon themselves to decide - and it's not always uniform.

Regardless, undue hardship is a very high bar to clear - because you essentially have to prove that you'd never be able to afford your loans, even on an income driven plan, for the rest of your life. Given that income-driven plans offer such low payments based on income, it's tough to prove.

It's why many people simply write off the ability to get student loans discharged in bankruptcy, even though it's theoretically possible.

Elimination Of The Student Loan Interest Deduction

In the Tax Cuts and Jobs Act, Trump originally proposed eliminating the student loan interest deduction. While it was saved in the final bill, it doesn't mean that Trump still wants to see it eliminated.

The student loan interest deduction provides up to $2,500 in deduction of the interest you paid on a student loan. 

While this is a handy savings, it does phase out at relatively low income levels.

Frequently Asked Questions about President Trump's Student Loan Plan:

Will Trump forgive my student loans?

While nothing is set in stone, it seems very likely that whatever program Trump implements will have an end of term loan forgiveness as a component. His most recent thinking is forgiveness would be after 15 years of payments.

How do I get signed up for student loan forgiveness?

Make sure your federal loans are enrolled in the direct loan program. If they are not, consolidate them into the direct loan program. If they are Stafford loans you may want to see if you qualify for any of the Stafford forgiveness programs. 

Will Trump lower my student loan payment?

You likely don’t need to wait for Trump to lower your payment, you may be able to lower your payment today. Based on his statements so far it is likely he will continue the Income-Driven Repayment program that helps borrowers lower their payment to a manageable size.

Will Trump lower my student loan interest rate?

So far he has not made any definitive statements regarding interest rates, but he has said the Department of Education shouldn’t profit from student loans. One way to make sure they are not profiting would be to lower the interest rate.

Will Trump do away with the Public Service Loan Forgiveness?

He has not stated this directly. However, he has said that he wants to roll all current federal student loan programs into a single Income-Based Repayment program. One can only assume that this would include the Public Service Loan Forgiveness program as well, but this is by no means certain.

Trump’s cancellation of student loan protections may grow the federal government’s involvement.

Under the Trump administration, the Department of Education has removed Obama era protections for student loan borrowers who want to rehabilitate their loans.

By making rehabilitation of privately held loans less attractive, borrowers are more likely to opt to skip rehabilitation and immediately consolidate their FFEL loans into the Federal Direct Loan Program to take advantage of income-based repayment programs.  When borrowers take this action, it moves loans from private balance sheets to the federal government.

References:

[1]  H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 https://www.congress.gov/bill/115th-congress/house-bill/1

[2] American Opportunity Tax Credit https://www.irs.gov/credits-deductions/individuals/aotc

[3] Menendez, Booker, Colleagues Demand DeVos Improve Guidance to Student Loan Borrowers Impacted by Trump Shutdown https://www.menendez.senate.gov/news-and-events/press/menendez-booker-colleagues-demand-devos-improve-guidance-to-student-loan-borrowers-impacted-by-trump-shutdown

[4] What is Public Service Loan Forgiveness? https://www.consumerfinance.gov/ask-cfpb/what-is-public-service-loan-forgiveness-en-641/

[5] Winners and losers in President Trump's student loan plan https://www.brookings.edu/research/winners-and-losers-in-president-trumps-student-loan-plan/

[6] Why Public Service Loan Forgiveness Is So Unforgiving http://wusfnews.wusf.usf.edu/post/student-loan-whistleblower

[7] Trump plan would base student loans on employability https://hechingerreport.org/trump-plan-base-student-loans-employability/

[8] Trump’s Plan for College Students: A Cure for the Student Loan Crisis? https://thebottomline.as.ucsb.edu/2016/11/trumps-plan-for-college-students-a-cure-for-the-student-loan-crisis

[9] Trump Budget Request for FY 2019 Slashes Spending on Student Aid, Research https://www.acenet.edu/news-room/Pages/Trump-Budget-Request-for-FY-2019-Slashes-Spending-on-Student-Aid-Research.aspx

[10] Penn GSE Experts on the Future of Higher Education Under a Trump Administration https://www.gse.upenn.edu/news/press-releases/penn-gse-experts-future-higher-education-under-trump-administration

[11] OVER $100 BILLION IN STUDENT LOANS TO BE FORGIVEN BY FEDERAL GOVERNMENT https://publicpolicy.wharton.upenn.edu/live/news/1609-over-100-billion-in-student-loans-to-be-forgiven