PRESIDENT TRUMP’S IMPACT ON YOUR STUDENT LOANS

The video version for my audio/visual friends:

The wordy version for my friends reading this at work, trying not to get caught: 

This past election seemed to really divide people into two groups: 1) people who hate Donald Trump and 2) people who hate Hillary Clinton more than the people who hate Donald Trump. There is a lot of uncertainty across the board with a lot of the plans Trump has mentioned, but the thing that concerns me the most is the state of our student loans. But frankly, I would have been concerned no matter who won the election.

With regard to student loans only, a Donald Trump presidency might actually be good for people like us who are high debt high income earners, because of Trump’s plans for income driven repayment. This is of course, assuming that he actually brings his income driven repayment plan into fruition. It will probably be bad for most everyone else, especially low income folks trying to get student loans and anyone who needs student loans but wants to major in the liberal arts (like I did), as set forth below.

This change in the White House has left us with questions, like: what will happen to income based repayment? What will happen to people who have already signed up for student loan forgiveness plans? What will happen to student loans generally? I don’t know about you, but I was not able to extract a lot of concrete plans for student loans from Mr. Trump during this campaign seasons. I have heard a lot of general ideas, and am very curious to see how they pan out over the next few years. Of course, it could be like Obamacare where he will change his mind once he realizes how big of a mess all of this is.

Here is what I have heard from Trump over the past few months coupled with my two cents:

HE WANTS TO HOLD COLLEGES ACCOUNTABLE.

He wants to make colleges share the risk.

Trump wants to hold colleges financially accountable when students graduate without jobs. Again, I have no idea what this actually looks like. If a student graduates without a job lined up, how will the college be accountable? Will they be paying a fine? Who are they accountable to? The student? The government? What about students who don’t want to get jobs after they graduate? What about the fact that there just aren’t enough jobs for everyone? There are one million unanswered questions on how he will achieve this. Except for that last question. He has promised that he will simply create more jobs. I wonder why no other President has thought of that.

Trump also plans to hold colleges accountable when students fail to make payments on their student loans. He has threatened to withhold tax exemptions from universities and has stated that holding colleges accountable for their students’ loan payments forces them to have “skin in the game.”

HE WANTS TO TAKE THE FEDERAL GOVERNMENT OUT OF THE COLLEGE EQUATION

He has threatened to completely shut down the United States Department of Education, or at least to “largely eliminate it,” which he stated in his book, Great Again. Obviously this raises a lot of questions. I will address two:

      1. First, does he have the authority to eliminate the Department of Education?
        1. The short answer is yes, but not without the support of Congress.
      2. What happens if there is no Department of Education?
        1. It means that there will be no federal student loans, period. Depending on who you are, this could be a good or bad thing. If we make private lenders compete, it could drive down interest rates for student loans. But we lose some of the protections that we have with the federal government. We will likely see more discrimination on who qualifies for student loans in the private sector. Basically, forget about equal access to education. People with low earning potential, bad credit, and or low income will probably have a hard time qualifying for student loans. Trump has also discussed linking student loan eligibility to a borrower’s earning potential. So, farewell liberal arts.
        2. It means that there will be no federal pell grants. Obviously these grants help a lot of folks go to school who could not otherwise afford it. Certainly, not having them will cut costs for the federal government, but there will be a chunk of people who are going to have to figure out how to fund school some other way.
        3. We’ll likely have inconsistent education data. The Department of Education gathers data and reports trends to Congress, educators, and the general public. So we will know less. Ironic since we’re talking about education here.
        4. Colleges may lose their funding. Many colleges rely on federal dollars simply to keep their doors open. This would likely effect private universities the most, but also realize that states will likely be spending more on higher education than they are now just to keep their own universities afloat.
        5. It is really, really unclear.

He wants to remove the federal government from profiting from student loan debt.

In an interview with The Hill, he said, referring to student loans, “That’s probably one of the only things the government shouldn’t make money off. I think its terrible that one of the only profit centers we have is student loans.”

I agree, it is terrible that the only people we are making money off of are students, who are arguably some of the poorest people in the nation. I’m not sure that completely shutting down the system is the way to go, but I am definitely intrigued at where this is all headed. It is also fairly unclear whether the federal government actually earns money off of student loans because there is so much money going in and out of the system.

So, what happens if there are no federal student loans? Everything becomes privatized. We would all get our student loans from private lenders. As stated above, this creates a significant equal access to education issue.

He wants to push colleges to cut tuition.

That is nice in theory. And college tuition is a HUGE problem. As it stands right now, there is all the incentive in the world for colleges to increase tuition. There is really no regulation on this. All an accredited school really has to do is charge high tuition and the federal government will back it up by providing students with that amount in federal student loans. Trump has not set forth how exactly he will push colleges to cut tuition, other than withholding tax exemptions, but if there are no federal loans (because there will be no Department of Education) then that may solve the problem itself—colleges that charge outrageous tuition may end up putting themselves out of business.

HE WANTS TO CHANGE INCOME BASED REPAYMENT

He wants to consolidate all of the student loan repayment plans into one big income based repayment plan.

      1. Does he have the authority to do this?
        1. Yes. And unlike eliminating the Department of Education, this would not require Congress to act.

Trump takes a fairly liberal stance on income based repayment. He views current student loan repayment options as a “confusing maze” and plans to simplify the process. In fact, he has said, “you graduate from college and you’re starting out with like an anchor around your neck… no good, its no good.” (Read about it at TIME.) In his view, consolidating all student loans into repayment such as this would make student loan repayment much easier to navigate. He wants all graduates with federal student loans to pay 12.5% of their income to student loans, regardless of income, for 15 years, with the remaining balance forgiven.

And you know, I agree. Having an anchor around my neck is no good. And student loan repayment options are indeed needlessly complicated. However, Trump really hasn’t provided details of how to pay for this nice program and, according to Travis from the Student Loan Planner, that is a major flaw and makes Trump’s plan unlikely to succeed.

Another big implication if we consolidate ALL of the student loan repayment plans, it likely means that Public Service Loan Forgiveness (where people can get their student loans forgiven after making payments for 10 years and working full time in public service) will be abolished.

That is a big deal. Let’s use lawyers as an example. A lot of students go to law school and pay six figures for their education. They have student loan payments each month that cost more than a mortgage on a nice house. They simply cannot afford to work in public service jobs (think public defender, district attorney type of jobs). Without this HUGE federal incentive, they really won’t even have the option to take a public service job.

However, on the upside, it could increase private or state level efforts to offer programs to public service employees. Maybe that is where those incentives should be coming from anyway. Maybe states will be encouraged to actually pay their employees fairly? Haha. I know, super funny. Please don’t fire me Oklahoma.

Finally, income driven repayment has been criticized heavily in the past because of the poor incentives it offers to students and colleges. It provides the incentive for students to borrow more– students with higher balances end up having more of their loans forgiven at the end of the repayment period. There is no reason to borrow less if the balance will be forgiven. Another problem with income based repayment is that it gives colleges incentive to raise tuition. There are obvious negative consequences to both of these incentives. The federal government is needlessly shelling out our tax dollars. While income based repayment certainly needs reforming, Trump has not addressed how his proposal of switching all student loan repayment to income based repayment will solve either of these problems.

As you can see, it is pretty unclear where student loans are headed. If Trump actually does what he has proposed, there are certainly some big time implications for just about all of us.

So what does that mean for us specifically? For now, not much. We will keep aggressively paying off our loans. Want to cut out the uncertainty of your student loans? Refinance them with a trusted lender — you’ll lower your interest rates and won’t have to worry about what is going on in Washington.

What do you think about Trump’s plans for student loans? How do you feel about income based repayment? Can we survive without the Department of Education?

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16 Replies to “PRESIDENT TRUMP’S IMPACT ON YOUR STUDENT LOANS”

  1. Great article. I think that his goals of eliminating the Dept of Education and having borrowers pay 12.5% of their income on their loans are diametrically opposed. How would he administer the largest national education benefit in the country’s history without a massive Department of Education? How would he raise the money to pay for this benefit without a YUUUGE (sorry had to) appropriation from Congress? The devil’s in the details.

    1. redtwogreen@gmail.com says: Reply

      Thanks Travis. I completely agree. I don’t see how most anything that he offers could come into fruition without a department such as the department of education. So, something’s gotta give. Either he is not going to be shutting down the Dept of Education or he won’t be pulling off his income based repayment plan. Honestly, probably neither.

  2. I often wonder how colleges can have billion dollar endowments and then have tuition increase every single year above inflation. I don’t pretend to have a good solution but it does seem like colleges have very little incentive to reign in tuition hikies.

    1. redtwogreen@gmail.com says: Reply

      It really is so mind blowing. I really think if the govt required an accounting of where tuition dollars were going (something above saying well, __% went to “administrative costs”– but if we really knew exactly where those dollars were going, I’m guessing tuition would be much, much lower. At least at schools where it has gotten out of control. (Looking at you dental schools and law schools!)

      1. I agree. I can understand schools who do not have endowments, but you would think that at some point a school with a big endowment could utilize some of those funds to cut tuition costs. Or perhaps part of the issue is that the schools with endowments see no need to offer that incentive – they are already turning away a large % of applicants!

        1. redtwogreen@gmail.com says: Reply

          Exactly. Really only pertains to the schools w endowments and they definitely have no incentive to cut tuition costs.

  3. The Accountant says: Reply

    Most endowments are “permanent” meaning any principal contributed is not to be withdrawn. The point of this type of endowment (which most colleges have) was supposed to be that the money will grow with the market and any appreciation (capital gains/dividends) are taken out for operating expenses/scholarships/aid etc.

    At the rate colleges are building new buildings, increasing salaries for profs/admin, and offering new programs to entice students, it’s easy to see that investment gains probably won’t rise at the same rate as the expenses. I’ve seen cases where colleges start withdrawing principal, and they’ve gotten in a lot of trouble, so they combat it with raising tuition.

    1. redtwogreen@gmail.com says: Reply

      Interesting! I didn’t know they could get in trouble for withdrawing principal but that definitely makes sense

  4. Thanks for the rundown. I did not realize that Trump wanted to expand IBR and forgiveness. I am the lawyer that you used in your example. I went to law school and took on a ton of debt. I then took a public service job that I would not be able to afford without the Public Service Loan Forgiveness program. I am watching anxiously to see what happens in this area.

    1. redtwogreen@gmail.com says: Reply

      We’ll see what he actually accomplishes, but in the mean time, it can be a little nerve racking that is for sure. I also went the public service route but I was able to graduate fairly unscathed (about $40k of debt, compared to a lot of my friends who are more like $140k), so paying it off on my own makes a little more sense (cents) for me. Crossing my fingers for all public service workers everywhere!

  5. Trump has said a lot of things that sound good in theory. I think that’s why we saw and initial upswing in the market (following the initial shock that he was actually going to be elected). Now the market has cooled off and is holding steady. The euphoria of all his talk has worn off and now people are waiting to see how in the world he is going to do all this.

    Holding schools accountable is a perfect example. To many, it sounds good. But how in the world would you hold a school accountable. And if he did find a way, think how much admission standards would go up. Why would a school want to take a chance on a marginal student if they’re going to get fined if that student can’t graduate or get a job?

    1. redtwogreen@gmail.com says: Reply

      Exactly. I think (and kind of hope) he has said most of what he has said just to get elected. It’s also hard to imagine how he will hold colleges accountable without the dept of education. Perhaps he intends to do so himself.

  6. As the total # of federal borrowers that have enrolled in IBR plans has increased from 5% in 2012 to 25% in 2016, student loans are a big deal. It’s a very large reason why I haven’t pursued a gradaute degree, the opportunity cost is too high.

    I think his streamlining the IBR plan to 12.5% would only be somewhat cost-effective if he eliminated the part of the DoE that oversees K-12 education. Meaning getting rid of Common Core & any remnants of No Child Left Behind.

    But the largest problem is still the annual rapid increase in higher education costs. The cost of my 4-year school has risen 66% in the 8 years since I graduated.

    1. redtwogreen@gmail.com says: Reply

      I definitely agree that the biggest problem is the rapid increase in tuition especially given that we are just now talking about student loans as a problem in a robust way. I was lucky to graduate from college and lawschool fairly unscathed but even then- I always wonder about the opportunity cost if I had just stayed in the workforce/worked my way up I would honestly be in a better place financially

  7. I am curious about all of this. We have been on IBR for the past two years, and because of our family size (4 kids!) we have had a minimum payment of $0. I’ve still determined to pay off our 74K in student loans in about five years, even though my state-employed husband qualifies for Public Service Loan Forgiveness. I don’t like having to jump through lots of hoops, and waiting for 10 years to pay off our loans feels like too long. It’s hard sometimes – I think of what we could do with our loan money if we were taking the Public service route, but I feel better in situations like this where the program could be up in the air that we are on our own timetable to pay things off.

    1. redtwogreen@gmail.com says: Reply

      That is exactly how I feel Jenni. It would be SO nice to go full on the public service forgiveness route, but it makes me feel too much like things are out of my control and could change on me down the road. And you are right– you have to jump through so many hoops. We are doing exactly the same thing right now. We are signed up for IBR but throwing as much money as we can at our loans and we plan to refinance ASAP. Good luck on your journey- we are loving your blog 🙂 Hopefully this new presidency won’t shake things up too much.

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