By Richard Best: Student loan borrowers may have cause for optimism under President Donald Trump’s proposed repayment program for federal student loans. Although all of the details have yet to come out and the program is only in the proposal stage, low-income student borrowers could be looking at a much shorter timeframe for having their loans forgiven – 15 years as opposed to the current 20 to 25 years under current plans.
Shorter Time Equals Lower Interest Costs
There would a small tradeoff, which, depending on your financial circumstances, might not be a significant hurdle. The Trump plan would require borrowers to pay 12.5% of their annual income as part of an income-driven repayment plan. Currently, the REPAYE (Revised Pay as You Earn) plan requires borrowers to pay 10% of their income towards the loan. Essentially, under the Trump plan, student borrowers will be asked to pay 2.5 percentage points more on their loan in return for shortening the repayment period five to ten years.
Under the Trump plan a borrower earning $40,000 a year would pay about $43 more each month on a $24,000 of federal student debt, while a borrower earning $20,000 a year would pay just $8 more a month. In either case, the borrowers would pay down their debt more quickly under the Trump plan. The borrower earning $40,000 would pay off the total debt within 9 years versus 11 years under the current plan. For the low income borrower, they would be able to seek forgiveness in 15 years versus 20 years under the current plan.
More importantly, the borrowers will pay less overall costs under the Trump plan. Assuming a $24,000 federal loan with an interest rate of 4.1% over a 20-year period, a borrower would pay $14,166 toward the loan under the REPAYE plan. After 20 years, $35,041 would be forgiven. Under the Trump plan the total payments would amount to just over $12,000 with $29,500 forgiven after 15 years.
Among the details still to be learned is whether this plan will be retroactive, covering outstanding student loans or only applicable for new loans. The other, very big consideration is whether there will be a tax consequence for the forgiven portion of the loans. Currently, only loans forgiven through Public Service Loan Forgiveness and Student Loan Forgiveness for Teachers are exempt from taxes. All other forgiven loans are considered taxable income. The information available on Trump’s plan doesn’t address taxation. However, there are bills being considered in Congress that would either reduce or eliminate the tax liability.
Will Trump Deliver on His Promise?
Although Trump never provided any details on his plan, and he has yet to put any meat on this original proposal, he seems to be intent on delivering on his campaign promises. Trump proclaimed on the stump that “Students should not be asked to pay more on debt than they can afford.” He went on to add, “And the debt should not be an albatross around their necks for the rest of their lives.” So far, his record on delivering on his promises is somewhat mixed, but a common sense reform to out-of- control student debt is sure to have bipartisan support.
Written By: Richard Best
Writer For: Easy.Credit