Big Student Loan Changes Proposed in the 2020 Budget

On March 11th, President Trump released his 2020 Budget Proposal. The 150-page document included cuts for many programs, including but not limited to education. It’s no secret that student loan debt becomes an ever increasing problem for students and their families. Here are a few proposed changes, specifically to higher education, you need to be aware of if you might soon find yourself in the market for a federal student loan.

Effect on Income-Driven Repayment

There are many ways to pay back your federal student loan including income-driven repayment (IDR) a focal point in the new budget proposal. The administration calls the current IDR plans “overly complicated.” The administration is not wrong. There are four different IDR plans, which provide different options for minimum payments based, as they sound, on your income.

Depending on the plan and their income, a borrower currently is required to pay back 10%-20% of their discretionary income each month. In addition, if paid as scheduled, borrowers are eligible for loan forgiveness after 20 or 25 years, depending on the loan and chosen repayment plan. Meaning, if they pay the required amount each and every month for the required time (20-25 years currently) their remaining student loan balance is forgiven. The monthly payment and years of required payment are not uniform across all IDR plans.

Under the 2020 proposal, all IDR plans would fall under the same guidelines. All who qualify would be required to pay 12.5% of their monthly discretionary income and all undergraduate balances remaining would be forgiven after fifteen years vs. the current 20-25 year timeline. For graduate borrowers, any remaining balance would not be forgiven until payments were made for 30 years.

Public Service Loan Forgiveness

Currently, there are federal plans allowing some loans to be forgiven prior to the 20-25-year IDR forgiveness schedule. In 2007 Congress passed the College Cost and Reduction Act creating the Public Service Loan Forgiveness (PSLF) program. This program forgives remaining balances on federal student loans if the borrower works full time for the government or a nonprofit, makes 120 student loan payments, and enrolls in an IDR plan. The 2020 proposal eliminates the PSLF program. It is unclear how persons working toward this 120-payment goal would be affected by this program cut.

Subsidized Loans

One federal loan option offered at this time is a federally subsidized loan. A subsidized loan accrues interest when a loan offer is accepted, just like other products. However, interest accrued on a subsidized loan is paid by the federal government until the borrower is no longer enrolled in school full-time. In the 2020 proposal, the offering of subsidized loans has been eliminated. What does that mean? It means the borrower of funds will immediately be responsible for the accruing interest. Currently, if you were to receive a subsidized loan during the first semester of your freshman year, the government pays the interest for you until you graduate or until your enrollment falls below full-time status. Under this proposal, that same loan will begin accruing interest and you (the borrower) are on the hook for said interest from day one. If you're not keeping up with the payments while in school, you'll have a loan plus 4 years of additional interest waiting for you when you graduate.

Other Noteworthy Items Included in the 2020 Budget Proposal

• Holding institutions “responsible” for their share of financial liability associated with student loans. Specifically, institutions which are setting students up for their inability to repay their loans–though the plan does not expand on the logistics of this proposal.

• Investing $1.8 billion in the Student Aid Administration. The goal of this investment is to streamline the current student loan process. The budget suggests the service and technology available needs to be streamlined. Though again, there is no elaboration on how these funds will be used to achieve said goal.

• Expanding Pell Grant Eligibility. This expansion will now include “high-quality short-term programs” but is not clear on qualifications for said eligibility.

The most important thing to remember is none of this is law. In fact, as we saw at the beginning of this year, it can take several weeks (or even months) to pass a budget even when the deadline has come and gone. Regardless of our feelings on these numbers/policies specifically, most can agree something needs to change within higher education. More than anything this budget proposal shows us how the Trump administration plans to address the issues faced by families regarding higher education.