Conquer your student debt. Refinance now.
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?
Trump’s Student Loan Forgiveness Changes In Effect
What has been passed in the last two years? Here we detail when the changes went into effect and who benefits from the new rules.
Stop Taxing Death and Disability Act
When Did This Take Effect: January 1, 2018; set to expire in 2025
Pros and Cons of the Law for Borrowers: 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.
Tuition And Fees Deduction Eliminated
When Did This Take Effect: January 1, 2018
Pros and Cons of the Deduction Elimination for Borrowers: The Tuition and Fees Deduction allowed taxpayers to reduce their taxable income by up to $4,000 for college tuition or related expenses. This 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.
Trump’s Student Loan Forgiveness Proposed Changes
The following are proposed changes and not yet laws. They are currently up for debate and should be on the radar of all federal loan borrowers currently in repayment, or who are considering federal student loans to cover future education expenses.
Discontinuing the Public Service Loan Forgiveness (PSLF) Plan
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.
Discontinuing the student loan interest deduction
Originally included in the Tax Cuts and Jobs Act, the Trump administration proposed eliminating the student loan interest deduction. The student loan interest deduction allows borrowers to deduct up to $2,500 of student loan interest paid in a given year on your taxes.
There is an income limit to this to this deduction, borrowers making over $80,000 do not qualify. The loan must also come from a qualified source and taken out for qualified education expenses.
Discontinuing this deduction was not included in the final bill, but could resurface again in the future.
No longer offering subsidized student loans
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.
Creating 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.
Having one plan would simplify the choices for those considering an income-driven repayment plan.
However, according to a NerdWallet article where the authors calculated repayment scenarios for borrowers using REPAYE at three annual income tiers: $20,000, $30,000 and $40,000, “in every income scenario, borrowers would pay more each month under Trump’s plan than when enrolled in REPAYE.”
Discharging student loans 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.
This article was written by Carolyn Pairitz Morris, Senior Editor at Earnest.