The Trump administration's budget proposal for fiscal year 2018 – which included billions of dollars in cuts to several student aid programs – has been widely panned by many in the higher education community as an attack on students. But the budget's proposed changes to the federal student loan system could bring a benefit to some students, according to a new report.
In a report published by the Brookings Institution last week, Jason Delisle of the American Enterprise Institute and Alexander Holt argue that President Donald Trump's proposal to eliminate the subsidy for Federal Direct Loans for undergraduate students and consolidate the existing income-driven repayment (IDR) plans into a new single plan would result in a net increase in benefits for undergraduate students. Under Trump's proposal, borrowers would pay 12.5 percent of their discretionary incomes for a certain repayment term: 15 years for undergraduates, and 30 years for graduate students. Although the proposal would "substantially reduce" benefits for undergraduate students, it would be "clearly a net gain" for undergraduate students, particularly those with higher debt loads and relatively higher incomes.
Essentially, they argue, the loss of the in-school interest subsidy would be balanced out by earlier loan forgiveness. Taken together, Delisle said the proposed plan is far more generous than the current Income-Based Repayment (IBR) plan, which requires borrowers to pay 10 percent of their discretionary income each month, with remaining debt forgiven after 20 years. Delisle and Holt run through several scenarios to show how borrowers would fare under the plan, depending on their cumulative debt and earnings.
"It's fair that when you look at it, it looks like there's a bunch of line items that look like students are losing money," Delisle said. "You can look at it and say, 'This doesn't look very good for undergraduate students, but you actually have to do quite a bit of work to figure out whether or not it's a net loss."
Looking just at the changes in repayment terms, a borrower with $15,000 in Subsidized Stafford loans who earns $20,000 per year (with a 4 percent annual increase), would see his or her monthly payments go up from $16 under the current IBR program to $20 under the Trump proposal, Delisle and Holt calculated. Although the borrower would pay slightly more each month, the earlier debt forgiveness would result in larger savings. The borrower would pay a total of $15,602 under the current IBR plan and a total of $10,954 under the Trump proposal. And the savings would be greater if the borrower had more debt. Higher-income borrowers with larger debt balances would benefit more from the shift in the loan forgiveness timeline because they would forgo their larger monthly payments sooner.
The Trump proposal would leave students with slightly higher total loan balances due to the elimination of the in-school interest subsidy. That same first borrower with a $15,000 loan balance at the beginning of repayment would have a balance of $16,950 under the Trump proposal, the report found. But the extra accumulated debt would be forgiven in the end. The same would be true for the higher-income borrower with more debt.
"The way to think about it is to think of Subsidized Stafford loans as loan forgiveness," Delisle said. "You're having some of your debt forgiven immediately because the interest isn't accruing. If you look at it that way, the Trump budget is [changing] when you have that money forgiven – not whether. It's immediately, or after 15 years."
Still, the apparent benefit for undergraduate students would come as a result of a reduction in benefits for graduate students, who would see their repayment term extended to 30 years.
But some higher education professionals and advocates have argued that the Trump student loan proposal would not be a win for students when taken in the context of the entire higher education budget proposal. Trump's budget proposal would eliminate the Supplemental Educational Opportunity Grant (SEOG) program and the Public Service Loan Forgiveness (PSLF) program, remove roughly $4 billion from the Pell Grant surplus – which would not immediately result in a Pell Grant decrease – and halve funding for the Federal Work-Study (FWS) program.
Delisle claimed the proposal as a whole would still be a net win for undergraduate students, saying the additional savings from earlier loan forgiveness would likely outweigh losses from SEOG and FWS, programs that do not affect every college student, he said.
In 2014-15, approximately 1.6 million students received an SEOG award, with an average award of $607. Just under 71 percent of dependent recipients came from families with an income of less than $30,000, according to NASFAA's Student Aid Profile. Approximately 651,000 students received FWS in 2014-15, with an average award of $1,689. Of dependent undergraduate recipients, 45 percent had family incomes below $42,000, according to the profile.
David Sheridan, director of financial aid at Columbia University's School of International and Public Affairs, said it's important to look at the budget proposal in its entirety.
"To me, this is the equivalent of an employer saying, 'We're going to increase everyone's hours, reduce their pay, eliminate their benefits, but you'll get nicer chairs to sit in,'" Sheridan said.
"To say that this is a net positive over what we saw from eight years of the Obama administration is a very strange interpretation of things, especially when you take it alongside things like a complete slamming on the brakes on defense to repayment claims and gainful employment regulations," Sheridan added. "These are things that are impossible to ignore. You add up all of these and it's a scary picture for the concept of access."
But Delisle contended that the proposal would actually simplify borrowing and repayment for students, and address some flaws in the current repayment system. Subsidized loans add complexity to the loan system, Delisle said, by giving students two different types of loans at the same time. He and Holt also argued in the report that the interest subsidy is poorly targeted. Still, the Trump proposal is flawed in that it would result in larger forgiveness benefits to higher earners with more debt, he said.
One way to address that problem, though it would add complexity, would be to have different tiers of loan forgiveness for different amounts of debt, Delisle said. The problem with IBR "writ large," he said is that borrowers with vastly different amounts of debt have the same terms.
"What the Obama plan showed … and what Trump's changes are revealing yet again is the same mistake – it becomes fraught to give everyone the same terms when you have vastly different amounts of debt," Delisle said. "The irony is in trying to equalize treatment … you're actually in a way treating them unequally because one person is getting a much bigger benefit."
Regardless, Delisle said the loan proposal itself would face an uphill battle in both directions on Capitol Hill. Democrats would oppose the budget proposal in its entirety, while Republicans would take issue with increased loan forgiveness, he said.
"Congress can pick and choose what it wants to do," he said. "I would be surprised if they did something like increase loan forgiveness for undergraduates."
Publication Date: 8/9/2017