This past year brought significant attention and debate to the hot-button issue of student loans. With 44 million borrowers carrying $1.3 trillion in debt, government officials were forced to take note in the midst of a huge election year — and it’s about time. The average graduate walks away with $37,172 in student loan debt, a 6 percent increase over last year’s average. And nearly 10 percent of borrowers are in default, leading to garnished wages and wrecked credit.
The debt that was supposed to lead to a college degree and a better future is holding graduates back — keeping them buying a home, starting their own business, and even from getting married. But political candidates took note of the issue, and President Trump announced a bold approach to student loans. Here are five student loan changes you can expect to see in 2017.
Changes to income-driven repayment plans
President Trump has outlined a drastic change to income-driven repayment plans. Under his plan, the government increases the payment cap at 12.5 percent of the borrower’s income, but it would reduce the repayment term to 15 years. After 15 years of qualifying payments, the lender would forgive the remaining balance.
Right now, income-driven repayment plans have terms ranging from 20 to 25 years, so knocking off five to 10 years of payments could dramatically reduce how much borrowers pay back.
“Students should not be asked to pay more on the debt than they can afford,” Trump said at a rally in October 2016. “And the debt should not be an albatross around their necks for the rest of their lives.”
Eliminating forgiven loans as taxable income
Today, if borrowers are in an income-driven repayment plan and the balance is forgiven, the discharged amount is taxable as income. That can leave some borrowers with huge tax bills which can be a significant burden — but legislators are working to change that.
Representative Jim McDermott sponsored a new bill — H.R. 2429, the Student Loan Tax Debt Relief Act — that would exempt student loans from being taxed as income. For those carrying a large amount of debt on a small income, this bill could result in thousands of dollars in savings.
Refinancing for both private and federal loans
Legislators like Elizabeth Warren have increasingly brought up the issue of the federal government profiting off of student loans. Many government officials are working to change the system to help borrowers better manage their debt.
One major area of focus is the move to allow borrowers to refinance their federal student loans at current interest rates. Right now, those with older, high-interest federal loans can only refinance if they go through a private lender. That means they also forfeit their right to federal loan benefits, like income-driven repayment plans and the ability to enter forbearance or deferment.Allowing borrowers to refinance their loans would enable them to get a lower interest rate and save hundreds or even thousands over the length of their repayment terms. Allowing borrowers to refinance their loans would enable them to get a lower interest rate and save hundreds or even thousands over the length of their repayment terms.
Several states have launched their own programs to help borrowers because they were sick of waiting for the federal government to come up with comprehensive change.
Maryland launched the SmartBuy program, for example, which helps people with student loans become homeowners while paying off their debt. Allocating $10 million to the program, the SmartBuy initiative puts 15 percent of the home’s purchase towards paying off the buyer’s student loans.
And New York announced a new plan to make public colleges tuition-free for families in New York who make less than $125,000. Eligible students could save thousands in college costs through the program. As student loans continue to burden borrowers, more states will likely take action with their own initiatives, rather than waiting for federal reform.
One of the biggest challenges facing those with student loans are the rules regarding extra payments. Most companies make it exceedingly difficult to pay loans off early. When borrowers make an additional payment, lenders direct it to interest or future payments rather than to the principal, making it nearly impossible to pay off the debt ahead of schedule.
Representative Susan Davis introduced bill H.R. 3786, the Student Loan Fair Prepayment Act. Under the new bill, lenders would be required to direct any extra payments to the outstanding fees and then to the principal due on the loan.
By having the payments directed to the principal, borrowers will save money in interest over time.
Millions of Americans are facing student loan debt and struggling to manage their payments. It’s one of the most pressing issues young people are facing today and a major issue for politicians on either side of the aisle.
None of these changes will happen overnight, but it is likely we will see significant reform over the course of the year.
Originally posted on Forbes