Getting a college or graduate school degree is not cheap. Just ask one of the 45 million students who have amassed a staggering $1.56 trillion in student loans. This is the highest that student loan debt has ever been.
It’s no wonder that the government wants to effect some changes to student loan policies. On the one side of the spectrum, they want to cancel a lot of debt and on the other side, they want to discontinue loan forgiveness.
Regardless of where you stand with your student loans, this year is likely to see several changes. Here’s a look ahead at some possible changes to prepare for.
The Current State of Affairs
As things stand now, there are a number of federal laws that govern both private and federal student loans.
The Higher Education Opportunity Act of 2008 set the standard by which schools could qualify for federal aid, giving more students the opportunity to further their studies.
The Student Aid and Fiscal Responsibility Act of 2010 enabled direct loans and increased the options for income-driven repayments.
The Tax Cuts and Jobs Act of 2017 gave some relief for the permanently disabled who qualified for forgiveness due to their disability. The act exempted these borrowers from paying income tax on the forgiven portion of their federal student loans.
However, the changes that the current administration wants to make would see private loan agencies getting more control over loans. These changes would also affect how repayments and forgiveness work for borrowers.
So, what are the changes that we’re looking at?
Public Service Loan Forgiveness Might be Coming to an End
The Public Service Loan Forgiveness Program (PSLF) is a popular program among students. However, the Trump administration is looking to propose bills that would see the program completely scraped.
Former President George W. Bush, established the PSLF in 2007 in order to give students an opportunity to have their loans forgiven. Under the program, students work in an eligible public service or government job. After completing ten years of service and making income-based repayments, their outstanding debt is canceled.
The initial plan with the PSLF was to encourage college students to go and work in the public service sector. However, there was a gap in communication between the federal government and FedLoan which saw 99 percent of the first round of applicants denied.
Needless to say, the program has not had the smoothest run. According to the Department of Education, as of March 31, 2019 a recorded 864 borrowers had their respective loans forgiven under the program.
Potential Changes to Federal Loan Repayment Plans
At present, there are four income-driven repayment plans for federal loans. However, the Trump administration is looking to consolidate these plans into one scheme.
As things stand now, low-income borrowers are able to pay their student loans at 10-20% of their income over 20-25 years. After this period, their loans would be forgiven. However, the new proposal would see the following changes take effect:
- An increase in income percentages. Most of the current income-driven repayment plans require a 10% repayment after tax has been deducted. The new proposal would increase this amount to 12.5% of your income, at a minimum.
- A decrease in the number of years required to pay off undergraduate loans. At present, undergraduate loans are forgiven after 20 years of income-based contributions. However, under the new proposal, this total number would be reduced to 15 years.
- An increase in the number of years required to pay off graduate loans. Graduate student loans, on the other hand, would not be forgiven until 30 years’ worth of income-driven repayments.
Discharging Student Debt During Bankruptcy Could Become Easier
At present, you can only have your debt discharged when you file for Chapter 7 or Chapter 13 bankruptcy. A judge determines whether your case falls under undue hardship. When making this decision, the judge considers the following:
- If paying your student loans would prevent you from maintaining a minimal standard of living
- If there is evidence that you made an effort to repay your debt
- If you struggled to pay off your debt for most of the majority of the loan terms
But the Department of Education is currently hard at work to redefine what constitutes undue hardship. If the terms for undue hardship are broadened, students will have an easier time getting their loans cancelled when they file for bankruptcy.
Private Lenders Could Originate Federal Student Loans
Currently, the federal government funds all student loans out of their annual budget, which amounts to a staggering number. In order to reduce this burden on the federal government and free up funds for other projects, the Trump administration is considering re-establishing private lender loans where banks and other private lenders provide student loans.
What this means for student borrowers is no more fixed interest rates. Without Congress to fix interest rates on student loans, rates will be subject to the influence of lending markets. This could have a positive or negative effect on interest rates, depending on how the economy grows or declines.
Applying for a student loan in 2019 could look a whole lot different than in previous years. Key factors that would determine your payment outlook include your annual income and the type of loan you’re applying for, whether undergraduate or graduate. Some borrowers are likely to see benefits with the proposed changes while others will likely have to pay more back before seeing their loans cancelled.
Regardless of where you stand though, these are only proposals at present and only time will tell how things are going to change. For the time being, try not to get too overwhelmed.
If you’re a first time borrower, take out the least amount of loans possible. Consider schools where payments will be less intense, whether because of overall tuition costs or because of grants available. And don’t forget to submit your FAFSA and apply for scholarships. And don’t forget to create a monthly budget for college!
If you’ve already taken out loans, but are still in school, see if you can start making some payments towards your loans now to reduce the overall interest you’ll need to pay. And if you’re a grad already paying off student loans, keep making those monthly payments and, whenever possible, pay more than the minimum.
The best way to prepare for future student loan changes is to get on top of your finances now.
About Sandra Larson: Sandra is a blogger and an academic writer at CustomWriting.com. In her personal blog, she covers topics related to child training and upbringing. Her academic focus is on developmental theories and child psychology. These two writing activities allow Sandra to test her theoretical knowledge and practice sharing it with readers.