What does the future of student debt hold? What changes should borrowers anticipate during the new administration? Sometimes there are no simple answers, which seems to be the case currently. It is difficult to tell fact from fiction in the current climate of information sharing. Headlines seem alarming, but the reality remains that any change happening in the Federal Student Loan legislation is minuscule and slow going. Many bipartisan bills have been introduced in the last couple of years only to be turned down later by the Senate. Our President, Donald Trump, and our new Secretary of Education, Betsy DeVos, have been causing waves in Congress since Early January of this year.
Student Loan Crisis
The state of student debt is now being referred to as the 1.3 Trillion dollar crisis, behind only mortgage debt. Before the 2016 election, there was a push for “free college,” with Bernie Sanders, but now most time, energy, and bills are focused on legislation to shorten repayment periods, lower interest rates and consolidate the lenders into one organization instead of many. According to statistics from the New York Federal Reserve, there are more than 44 million people borrowing currently and the average student graduating now has $37,172 in student loan debt.
Changes to the Income-driven Repayment Plans
Currently, there is legislation proposed to alter the terms of repayment for some student loan repayment plans. The law has stated for some time that the debtor cannot charge payments that are more than 10% of the borrowers income, and that after paying 10% of their income for 20 years, the student loans would be forgiven. The Trump Administration has proposed new legislation that would slightly raise the amount of money being taken per month through the Income-driven Repayment plans and substantially reduce the time in which that money would be collected. Instead of the standard 10%, borrowers should expect the new rate to be 12.5% of income, or an eighth of all earnings. While this seems like a dramatic increase, and it is, simultaneously the reform would call for the repayment period to be lessened to 10-15 years instead of 20, at which time the borrower would be forgiven that debt.
Trumps proposal would probably benefit both lenders and debtors in the long run, some say. In the end, debtors will likely pay less money this way. This is especially true because the term of their repayment plan would include fewer of the highest-earning years. Likewise, student loan issuing organizations will likely make a more consistent profit in the long run. It is impossible to deny that losing a full eighth of one’s income will have some major effects, but the repayment period has been reduced by a full quarter. This is certainly a benefit worth considering.
The Trump Administration and education secretary Betsy DeVos have been considering methods to consolidate and streamline the student loan process. DeVos proposed that all student loan issuing agencies be handed over to the Treasury Department. This plan included cutting funds to the Department of Education by over 50%. Needless to say, these kind of proposals have some on edge, even downright angry, resulting in a few resignations so far, including James Runcie, the head of the Education Department’s Federal Student Aid Program. This proposal was found unsuitable, and has been withdrawn, but it does have certain possible benefits. Interest rates might go down and service might improve. Some say that bringing the IRS closer to the trillion dollar business of student loans makes sense.
The Unpredictable Horizon
In April of this year DeVos, officially withdrew two Obama-issued memorandums requiring that the government’s Federal Student Aid office do more to help borrowers manage or even discharge their loans. Some criticize DeVos for removing the memorandums, saying that it will cause many more borrows to default, though most do agree that the government spends too much money on the collection of student debt, spending over $800 million a year to collect on the $1.1 trillion in debt.
Meanwhile student’s applying for forgiveness under the Student Loan Forgiveness Program can expect no progress on their case anytime soon as these cases have been stalled for fear of fraud by the new administration leaving many to wonder what the future of student loans will bring.
Photo by DMichael Burns.