The new administration in Washington may bring changes in how student debt is treated. This post is the first in a series of discussing potential changes to student loans and repayment. Keep in mind that it’s unclear if any of these will occur. As of this date, no laws or executive actions have been taken that would change the current loan programs. These articles are intended to provide an analysis of the application of President Trump’s proposals. We will keep this site updated if and when things change.
A new Income Driven Repayment proposal
Income-Driven Repayment (IDR) plans have been part of US law since 1994 and in recent years were modified to provide additional relief to those struggling with student debt. As the terms have become more favorable to borrowers, they have become much more popular. All 5 IDR plans work in a similar manner where borrowers make payments determined by their income, instead of the debt amount, interest rate, and repayment term. There are two main benefits associated with IDR plans, cash flow relief, and the possibility to have the debt forgiven after making payments for a period of time.
While all the IDR plans have similar characteristics, there are significant and sometimes subtle differences such as the maximum repayment length before loans can be forgiven and the required payment as a percentage of income. In addition to the repayment terms, the origin of IDR plans establishes how they may change in the future by amendment.
President Trump has proposed his own version of IDR with different terms from the current plans. In Mr. Trump’s proposal borrowers would be required to pay 12.5% of income (an increase from the current 10% in PAYE, IBR for new borrowers and REPAYE, while a decrease from IBR for old borrowers and ICR). His proposal would discharge any remaining student debt after 15 years of payments (5-10 years sooner than the existing IDR options). It is unclear how he intends to go about making the changes.
Speculation on how changes could occur
Through executive action, he could amend the terms for PAYE and REPAYE, as they were both created via executive action under the previous administration. Changes to IBR (old or new borrowers) and ICR would require the legislators to pass laws modifying the bills passed in 1994, 2007 and 2010. There is speculation that the easiest route to make changes would be through an executive action that would combine the REPAYE and PAYE plan into Mr. Trump’s new IDR plan.
Complicating matters is that historically new IDR plans have taken years to become available to borrowers as the Department of Education engages stakeholders to provide feedback in their special rule negotiating process that determines the exact details of the new plans. When IBR was created via the College Cost Reduction Act in 2007, it took nearly two years before the plan became available to borrowers. President Obama signed an executive order to make the terms of New IBR available soon on October 2011, but the PAYE program was not available to borrowers until over a year later in 2012. The order for REPAYE was signed in June of 2014 but the repayment plan wasn’t an option until December of 2015. Assuming the same process as has occurred in the past it will likely be a few years until any changes are realized by borrowers.
In addition to these types of delays, there is an issue with amending any repayment terms currently available to borrowers. Each student loan borrower has signed a promissory note associated with their loans. The promissory note is the contract between the borrower and their lender, either the William D Ford Direct Loans Program, or the Federal Family Education Loan Program. The contract contains the repayment options for borrowers, and other terms and conditions. Any legislative or executive action would be very difficult to remove currently available repayment plans already contractually obligated to borrowers, as such the amendments made in the past have created new repayment plans, rather than canceling existing ones. This does leave open the door for removing available repayment options for new borrowers who have yet to sign their contracts containing their repayment options. This option would fall in line with other repayment options that were limited to borrowers obtaining loans after certain dates (IBR new borrowers, and PAYE).
So what does all this mean? Currently, there have been no orders or legislative action to change any repayment plans or add any new repayment plans. If changes were to be instituted there would likely be a delay before the application of the changes would filter to borrowers. Borrowers who area already in repayment plans and have taken out their loans in the past have promissory notes that contain their current repayment options. It would be a breach of contract for the federal government to amend or withdraw those plans already available to borrowers.
The most likely outcome is that Mr. Trump creates a new IDR plan available to borrowers with terms that may or may not be more favorable for some borrowers than their existing options. For those looking to obtain new loans in the future, there may be limited or different options from those currently available. Assuming Mr. Trump goes the route of executive action, future borrowers would still have ICR, IBR (old and new borrowers) and the new repayment plan ordered by the current administration as repayment options.
The changing environment underscores why it is so important for borrowers to work with a Certified Student Loan Professional (CSLP) who is knowledgeable able to help borrowers navigate the repayment process.
The financial implications of administrative changes to repayment options can have a drastic impact on the long-term financial well-being of those with student debt. Working with a CSLP is the best way for a borrower to establish a comprehensive financial plan that incorporates student loan repayment into the personal, professional and financial goals of those with student debt.