Winners and losers in President Trumps student loan plan
Alexander Holt
President Trump proposed major changes to the federal student loan program in his first budget request to Congress. These include reforms to the Income-Based Repayment (IBR) program and the interest-free benefit on some loans for undergraduates. This paper offers a first look at the likely net effect of these changes proposed for undergraduate and graduate students (excluding the effects of eliminating the Public Service Loan Forgiveness program). We use hypothetical borrower scenarios to compare how much borrowers with different loan balances would pay under the Trump proposal as compared to the existing program. Generally, we show that undergraduate students would receive a net increase in benefits relative to the current program due to earlier loan forgiveness. Those benefits are largest for borrowers with above-average debts and relatively higher incomes in repayment. The analysis also provides a reminder that graduate students can receive generous benefits under the current IBR program without having to earn a low income. The Trump proposal would substantially reduce benefits for graduate students below what they could receive under the current IBR program and even under the original 2007 version of IBR.
Introduction
Certain borrowers in the federal loan program have had the option to make income-based payments on their debts since the 1990s. However, this program was limited in important ways for most of its history and few borrowers used it. A series of changes between 2007 and 2012 made this option incrementally more generous and open to all borrowers. The changes helped transform the program from a little-used option into one that a quarter of borrowers choose today. 1 All new borrowers in the federal student loan program as of 2014 can use the most generous version of this program, now called Income-Based Repayment (IBR), which sets payments at 10 percent of discretionary income and provides loan forgiveness for any unpaid balance after 20 years.
At a campaign event in , then-presidential candidate Donald Trump announced that he wanted to allow borrowers to pay 12.5 percent of their incomes on federal loans and receive loan forgiveness after 15 years. 2 But it was not immediately clear if his proposal would increase or cut benefits for borrowers because it would simultaneously reduce the length of time borrowers would be required to pay due to earlier loan forgiveness and increase the amounts they would pay monthly.
President Trump reiterated this proposal in as part of a more detailed set of reforms in his budget request to Congress. 3 The details show that graduate students would clearly lose benefits due to a new 30-year loan forgiveness term up from the current 20-year forgiveness term. Borrowers in certain public sector jobs would also see their loan forgiveness term increased with the loss of the Public Service Loan Forgiveness program, which we treat as a separate benefit and exclude from our analysis. While budget documents show that the net effect of the IBR proposal would reduce the cost of the loan program by $7.6 billion a year , that information left open the question about whether undergraduate students would gain or lose benefits. 4 In fact, the budget added a further complication to that question: it included a proposal to eliminate the in-school interest benefit on a portion of loans for some undergraduates.
This paper offers a first look at the net effect of these changes for undergraduate and graduate students and compares them to the existing IBR program. We use hypothetical scenarios to compare how much borrowers with different loan balances pay under the different terms. Generally, we show that undergraduate students receive a net increase in benefits relative to the current IBR program due to earlier loan forgiveness. In fact, the Trump proposal would create the most generous income-based repayment program the government has ever offered undergraduate students without regard to the type of job they hold. 5 Graduate students, on the other hand, would receive loan forgiveness under the proposal in only rare circumstances, a major change from the current IBR program. In sum, the Trump proposal transfers benefits from graduate students to undergraduates. Before proceeding to that analysis, it is helpful to understand some of the key components of the loan program.