Will Borrowers Save Money under Trump’s Student Loan Plan?

on December 16, 2016

On the campaign trail, Donald Trump proposed a new income-driven repayment plan as a replacement for the current repayment plans available for federal student loans. How much money will borrowers save under this new repayment plan?
 

During a speech in Columbus, Ohio on October 13, 2016, Mr. Trump said, “Students should not be asked to pay more on the debt than they can afford and the debt should not be an albatross around their necks for the rest of their lives.”
 

Donald Trump then introduced his proposal, which will cap monthly payments at 12.5 percent of the borrower’s monthly income, with any remaining debt cancelled after 15 years of payments. The new repayment plan has a higher monthly payment than under Pay-As-You-Earn Repayment, but a shorter repayment term.
 

It is unclear whether Mr. Trump’s proposal bases the monthly payment on adjusted gross income (AGI) or discretionary income. Discretionary income subtracts 100 percent or 150 percent of the poverty line (PL) from AGI. Other policymakers have used the terms income and discretionary income interchangeably.
 

It is also unclear whether the cancelled debt will be treated as taxable income to the borrower. If the cancelled debt isn’t tax-free, it will substitute a tax debt for the education debt. The tax debt will be smaller than the outstanding student loan balance, but will nevertheless be unaffordable for some borrowers. All current income-driven repayment plans treat the cancelled debt as taxable income, except in conjunction with public service loan forgiveness.
 

The income-driven repayment plans are summarized by this table.
 

Repayment Plan Payments Discretionary Income Cancellation
Income-Contingent (ICR) 20% of Discretionary Income AGI - 100% PL 25 years
Income-Based (IBR) 15% Discretionary Income AGI - 150% PL 25 years
Pay-As-You-Earn (PAYER) 10 percent of Discretionary Income AGI - 150% PL 20 years
Revised Pay-As-You-Earn (REPAYER) 10% of Discretionary Income AGI - 150% PL 20/25 years
Trump 12.5% Discretionary Income AGI - 150% PL 15 years 


If one assumes that the borrower will be in repayment until cancellation of the remaining debt, the total payments under PAYER are 53.3 percent of the total payments under IBR. The monthly payments under PAYER are one-third lower than the monthly payments under IBR and the repayment term is one fifth lower. Thus, the total payments under PAYER are 10/15 x 20/25 = 8/15 of the total payments under IBR.
 

Using a similar analysis with Trump’s income-driven repayment plan, the total payments under Trump’s plan will be 12.5/15 x 15/25 = 50.0 percent of the total payments under IBR. Comparing Trump’s repayment plan with PAYER, the total payments under Trump’s plan will be 93.75 percent of the total payments under PAYER.
 

So, it would seem that borrowers will save money under Trump’s plan as compared with IBR and PAYER.
 

However, some borrowers may end up paying off their debt in full before reaching the 20 or 25 year term under IBR and PAYER. These borrowers may pay more under Trump’s plan, depending on the number of years in repayment. There are inflection points at 12.5, 15 and 18.75 years in repayment. But, most borrowers will pay less under Trump’s plan.
 

Nevertheless, Donald Trump did not specify whether his repayment plan is based on AGI or discretionary income. If it is based on AGI, most borrowers will pay more under his new income-driven repayment plan, as compared with PAYER.
 

Suppose that Trump’s plan is based on AGI instead of discretionary income. This will increase the total payments by as much as $33,412.50, based on the 2016 poverty line for a family size of one, $11,880, without annual inflationary adjustments. The increase in cost to the borrower will be greater if the family size is larger. If Trump’s plan is based only on AGI, Trump’s plan will have lower total payments than IBR only if AGI is greater than three times the poverty line and lower total payments than PAYER only if AGI is greater than 24 times the poverty line. That would require an AGI of $285,120 or more.
 

Even an alternative repayment plan, such as 10% of AGI for 10 years, would yield a greater total payments than under IBR for AGI less than 20.5 times the poverty line and greater total payments than under PAYER for AGI less than three times the poverty line.
 

Thus, whether Trump’s repayment plan saves borrowers money seems to depend on whether the repayment plan is based on AGI or discretionary income. If the repayment plan is based on AGI, it saves money only for the wealthiest of borrowers. If the repayment plan is based on discretionary income, it saves money for most borrowers.

 


 

When financial aid and federal student loans aren't enough to cover all college costs, consider financing the gap with private student loans. Shop around to find the loans that best fit your needs.

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