Summary: We examine the major changes to the federal student loan program proposed by President Trump in his first congressional budget request and the likely net effects of these changes for undergraduate and graduate students in comparison to the structure established under the Obama administration for the Income-based Repayment Program (IBR). Our overview focuses on the analysis presented in a new Brookings Institution report by Jason Delisle and Alexander Holt (2017) titled Winners and Losers in President Trump’s Student Loan Plan.1 This engaging report outlines the historical background of the creation of the federal student loan program by the U.S. Congress, highlighting key components of the program and the series of changes, culminating in a new proposal by the Trump administration, that have been made to the income-based payments option.
Delisle and Holt present an informative overview of the primary components of the federal student loan program including the distinction between subsidized and unsubsidized Stafford loans, the Plus loan program, and the Income-Contingent Repayment Program. The report also examines the recently implemented Obama administration alteration of the repayment framework of the IBR downward from 15 percent to 10 percent of a borrower’s adjusted income while implementing loan forgiveness after 20 years rather than 25 years. President Trump has proposed further reforms that would increase monthly payments to 12.5 percent of discretionary income, lengthen the loan forgiveness mark for borrowers with any amount of debt from graduate school to 30 years but shorten the term to 15 years for borrowers with only debt from undergraduate studies. Trump’s proposal would also eliminate Subsidized Stafford Loans and Public Service Loan Forgiveness. The comparative frameworks are tabled below.
Delisle and Holt analyze a set of hypothetical scenarios comparing how much borrowers with alternative loan balances would pay under the Trump proposal and the current program. In analyzing the net effects of Trump proposal for undergraduates, they demonstrate that while eliminating subsidized loans works to reduce benefits, the changes of the IBR would offsettingly increase benefits for many undergraduate students. This is because even though the borrower must make higher monthly payments under the Trump proposal, the earlier loan forgiveness is worth more in terms of reducing overall payments not least because people tend to have higher incomes later in their careers. Beside the psychological benefit of making payments for five fewer years for undergraduate students, the Trump proposal offers a clear monetary benefit for borrowers with higher incomes.2
Comparing Student Loan Components
|Current Policy||Trump Proposal|
|Income-Based Repayment (IBR)|
|Income exemption||150% of poverty level||Same|
|Payments as an income share||10% (over exemption)||12.5% (over exemption)|
|Forgiveness: undergraduates||After 20 years||After 15 years|
|Forgiveness: graduates||After 20 years||After 30 years|
|Subsidized Stafford Loans for Undergraduates||Interest-free during enrollment/lifetime borrowing limit is $23,000||Eliminated|
|Lifetime Loan Limits|
Based on the modeling, the Trump proposal delivers larger benefits than the current IBR program even with the loss of subsidized Stafford loans for those borrowers who use IBR and qualify for loan forgiveness. They described how a borrower who fully repays his loan, hence not qualifying for loan forgiveness under IBR, pays more in total due to the loss of subsidized Stafford loans (loans with interest-free benefits while students were enrolled). This is because the borrower leaves school with a larger loan balance that now includes accrued interest from the time spent in school.
However, if the same borrower receives loan forgiveness under the Trump proposal, that additional debt, due to interest accrued, is forgiven anyway. While the borrower leaves school with a higher loan balance under the Trump proposal, the additional interest is forgiven if the borrower uses IBR. Total payments under the Trump proposal are less than they are under the current IBR program with subsidized Stafford loans: the amount forgiven under the Trump plan being larger because the borrower starts repayment with more accumulated debt, but ultimately has it forgiven.
The Trump proposal in effect links the “interest-free benefit” borrowers would have gained from subsidized Stafford loans under the current program to the student’s own income during repayment, and only borrowers using IBR that have incomes low enough relative to their debts to qualify for loan forgiveness maintain access to the benefit. This is different from the current approach under which eligibility for Subsidized Stafford loans is based on student’s family income while being enrolled in school and the price that the school charges. Students from high-income families can currently gain eligibility for Subsidized Stafford loans if they attend high-tuition institutions and/or have multiple siblings concurrently attending colleges.
The Trump proposal reduces benefits to graduate students relative to the current program because it increases monthly payments by the same amount as for undergraduates, but instead of reducing the repayment period before loan forgiveness, it increases it from 20 years to 30 years. Thus making it far less likely for borrowers to receive loan forgiveness.
The study’s authors believe that Trump’s proposal addresses some salient issues associated with the current IBR Program. First, it rolls back large subsidies that the current IBR provides to graduate student that skew benefits toward upper middle-class families while low-income families struggle to finance undergraduate education. It also removes the perverse incentive associated with loan forgiveness eligibility for graduate students to borrow more rather than less under the current IBR program. This may induce downward pressure on graduate school tuition and impact decisions graduate student make on financing alternatives.
Delisle and Holt suggest that Trump’s proposal to eliminate subsidized Stafford loans represents a policy improvement because these loans add complexity to the student aid system. However, establishing two loan-forgiveness terms, one for undergraduates and another for graduates, is a downside to Trump proposal as it adds a new dimension of complexity.
Another downside to the Trump proposal which also occurred in the Obama administration, is the changes made to the IBR by shortening the loan forgiveness terms by five years (for undergraduates only). The effect of this change in IBR was that borrowers with higher debts and moderate incomes reap the largest benefits, lessening the progressivity of the repayment system.
Trump’s proposal also addresses a set of current IBR program flaws whereby graduate students with high loan balances receive the same loan forgiveness terms as undergraduate with low loan balances. It does this by providing borrowers who have small balances the opportunity for earlier loan forgiveness if they earn low incomes. However, not all undergraduates have low balances and not all graduates have high balances. Thus, Trump’s proposal increases benefits the most for undergraduate borrowers with relatively higher incomes and the largest debts load.
The authors conclude that while Trump’s proposal clearly represents a net gain for undergraduate students and improves how some subsidies are allocated, it goes too far in providing generous additional loan forgiveness to borrowers who are more able than many to repay their debts.
In summary, the research shows that undergraduate students receive a net increase in benefits under Trump’s changes due to earlier loan forgiveness. Graduate students, on the other hand, would receive loan forgiveness under Trump’s modifications only in rare circumstances, a major change from the current IBR program. It is clear that the Trump proposal shifts benefits away from graduate students toward undergraduates.
Research assistance on this note was expertly provided by Ms. Glory Igharo.
1. Evidence Speaks Reports, Vol. 2, #21, Center on Children and Families, August 2017.
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2. For a more broad-based and comprehensive analysis of needed structural changes in federal policy effecting student financing of higher education see: Jason D. Delisle, Reforming Student Loans and Tax Credits, Chapter 2 in What to Do: Policy Recommendations for 2017, American Enterprise Institute, June 2017. https://nationalaffairs.com/storage/app/uploads/public/doclib/HigherEd_Ch2_Delisle.pdf