Donald Trump’s first week as president has caused a great deal of controversy. Trump has signed orders on national security, immigration, mortgages, the national security council, Obamacare and others. Moreover, the Republicans and Trump have a busy legislative agenda over the next few months as they attempt to repeal and replace Obamacare, change the tax code for corporations and individuals, crack down on immigration, and tackle foreign policy issues.
Trump’s presidency will definitely impact all kinds of aspects of personal finance including student loans. In fact, a number of friends are little freaked out about the new administration. Some of that freak out is because of political reasons, but a number of my colleagues have high amounts of student loan debt, are currently on or about to enroll in the Public Student Loan Forgiveness (PSLF), and are unsure if Trump will massive change student loan relief for people with student loans.
The Obama administration actually did quite a bit to attempt to relief student loan debt. They created two new repayment plans (PAYE and REPAYE) which capped student loan payments at 10% of your discretionary income, which offered potential relief to millions of borrowers. Now that Trump is president many are afraid that these programs will be reversed or altered significantly.
Unfortunately, Obama’s plans did not necessarily solve the student loan issue and the larger issue of paying for higher education. So there is a lot uncertainly in the student loan space at the moment. Will Trump reverse PSLF? Will student loans be less available? How do we currently deal with the 1.3 trillion dollar student loan debt crisis?
Trump’s Student Loan Plans
So far Donald Trump has basically done what he has said he would do on the campaign trail, which is good and bad depending on how you look at it. Donald Trump’s plan for student loans is actually pretty good in many respects.
- Donald Trump would cap student loan payments at 12.5% of your income. Presumably, we assume that this is discretionary income. This would actually be a bit more than Obama’s cap of 10% of income. However, there are some student loan plans that are 15 or even 20%.
- People would their student loans for 15 years and then after that their loans would be forgiven. This is actually much better than the other plans (other than PSLF) because under Obama loan forgiveness comes after 20 or 25 years depending on your plan.
These are the basics of his plan.
Assuming that these two basic principles of Donald Trump’s plan come to fruition what does this mean for the other student loan plans. Here are the questions that remain?
- Will Trump keep in place the other plans put forward by the Obama administration? Frankly, there are two many plans. I think there should be the standard plan and Trump’s plan of 12.5% over 15 years isn’t a bad idea. Right now we have 5 or 6 to choose from and when you renew each year it is pain to navigate these plans.
- Will PSLF still exist? With this new plan by Trump will PSLF exist for those who have high amounts of student loan debt? Will it disappear?
- Will Trump’s loan forgiveness be retroactive? What about people who have been paying student loans for 5, 10, or 15 years? Is this plan retroactive? Do you start from scratch?
- Will Trump’s loan forgiveness be tax deductible? Currently, any PSLF loan forgiveness is considered to be tax deductible. However, if/when you have loans forgiven after 20 or 25 years it is NOT forgiven under current tax law. Technically, debts that are forgiven are considered to be income. That means the debt is added to your yearly taxes an you pay the IRS the tax rate you would be under. That is still better than having massive student loans, but owing the IRS thousands of dollars might be more dangerous than owing student loans.
The Bottom Line
The bottom line is that people who currently have student loans might actually have a better time under President Trump than President Obama. The problem is that there are many details to work out and the student loan issue does not seem to be a high priority for Trump at the moment. Until then current regulations for student loans will probably stay in place. However, this is one issue where Donald Trump may actually be better than his predecessors on.