The current generation of students is entering the workforce with more debt than any previous cohort of students and despite a strong economy recent borrowers continue to default at record numbers. There are also an increased number of borrowers who make partial payments, which allows them to stay out of default but increases the amount they owe on their student loan. The number of seniors entering retirement with outstanding student debt increased four-fold from 2005 to 2015.
Democratic candidates are vigorously debating different proposals to reduce student debt burdens. Less attention has been focused on policies being implemented and proposed by the Trump Administration. This paper looks at Trump Administration proposals and actions.
Reductions in student financial assistance: A paper by the Center for American Progress lists some of the reductions in financial assistance outlined in the Trump budget.
· Freezing the maximum Pell grant award over the next decade,
· Elimination of the $865 million Federal Supplemental Educational Opportunity Grant, a program serving 1.7 million students in 2019,
· Reduces the budget of the Federal Work Study program by $630 million leaving the budget at $500 million.
· Elimination of the Strengthening Institutions Program a $108 million program providing assistance to institutions serving a large number of minority students
· Elimination or reduction in several other programs providing attempting to assist at-risk students succeed in college
Elimination of subsidized student loans. The Trump Administration budget proposes getting rid of subsidized government student loans. The primary difference between subsidized and unsubsidized student loans involves an interest subsidy. The government pays all interest on subsidized loans prior to the initiation of repayment six months after leaving school or in a scheduled deferment. By contrast, interest accumulates to the borrower for unsubsidized loans.
Around 19 percent of all student debt issues in 2018–2018 was subsidized student loans. This is already down from 48 percent in 1998–1999. Go to figure six for these numbers. The Trump Administration wants all subsidized student debt eliminated.
The elimination of subsidized student loans will substantial increases in student debt repayments over the lifetime of the loan. Lifetime loan costs estimated here are based on the assumption that a person finishes an undergraduate program in four years and does not return to graduate school. Costs are much higher when the student borrower does not finish in four years or returns to graduate school at some point.
New Caps on Government Guaranteed Loans: Trump’s budget includes new caps on the amount students can borrow with caps being especially strict for graduate students. The impact of the cap will be to force many graduate students to take on private student loans. The increase in private loans will have a substantial impact on annual payments for many borrowers because the annual payments cannot be folded into an Income Based Replacement Loan. The private loans also often have higher interest rates than government backed loans.
Elimination of Public Service Loan Forgiveness Program: The Trump Administration is proposing to eliminate the public service loan program, a program that allows student borrowers working in non-profit positions to have their loans discharged after 10 years of service. The program was enacted with bipartisan support during the Administration of George W. Bush.
The first set of enrollees are now eligible for a loan discharge. However, around 99 percent of people who have applied for a loan discharge under the program have had their applications rejected. Most of these applicants believed they were on pace to having their loan discharges approved.
Lack of enforcement of loan servicers. There has been substantial concern that loan servicers have misled or given faulty information to student borrowers. An official at the CFPB has acknowledged the Department of Education has blocked oversight. The official in charge of the student loan office at the CFPB recently resigned when his office was restructured.
Lack of oversight has made it difficult for student borrowers to obtain loan discharges or reduce payments from both the income based replacement program and the public service loan forgiveness program.
Reverses Obama era policy on student loan forgiveness at schools that defrauded students: The Obama Administration implemented a loan forgiveness program for students who were defrauded by for profit schools. The Trump Administration cancelled the program and Secretary of Education Betsey Devos has been found in contempt of court for violating an order that the Department cease collection efforts for loans issued to students who were victim of fraud at one university.
Some Concluding Remarks: The combination of an elimination of subsidized student loans and limits on government guaranteed loans could have a large impact on costs for student borrowers. A first stab at estimating the impact of the elimination of subsidized student loans was done here. Additional work analyzing more complex situations will be available soon.
The maladministration and the decision to cancel public service loan programs without a phase out seems really unfair to people who are making employment decisions based on the existence of the program and on the assumption that loan discharges will actually be granted.
The cancellation of a program offering debt relief to student borrowers who borrowed from fraudulent institutions and a contempt ruling for refusing to obey a court’s order to provide the debt relief to affected students is just plain wrong on so many levels.
The reader who liked this post might also be interested in the post Trump Administration health care policy.
David Bernstein is an economist living in Colorado and author of the book Defying Magnets: Centrist Policies in a Polarized World.