If the Trump Administration gets its way, America’s future student loan borrowers will be paying a lot more to finance college. As part of the deep proposed cuts to the U.S. Department of Education, the Trump Administration’s budget proposal calls for Congress to enact sweeping changes to the terms and conditions students first borrowing next July would have on their federal loans. This includes ending loans that do not accumulate interest for borrowers with financial need while they are enrolled, changing how much of their income borrowers must devote each month to their loan payments, and limiting student debt forgiveness options, including eliminating one for those who will work in public service.
The Trump Administration’s rationale for most of these student loan cuts is to make sure taxpayers are not on the hook for unreasonable levels of debt borrowed by upwardly mobile graduate students. Because these students can borrow greater amounts of federal debt than their undergraduate peers, the typical graduate student could both receive larger amounts of loan forgiveness and also a bigger reduction in their monthly payment.
But simply making it harder for graduate students to obtain loan forgiveness is like fighting a disease by addressing only the treatment options. The patients—student borrowers—are going to continue getting sicker. The disease—unaffordable tuition—will keep spreading.
The budget blueprint seeks to revamp income-driven repayment (IDR), a set of payment options that allow borrowers to tie payments to their incomes and ultimately see some of their debt forgiven if they have not paid off the balance over many years in repayment. For example, a borrower who owes $30,000 and makes $30,000 a year would pay as little as $99 a month on their loan using an IDR plan, rather than $318 on the standard option that retires the debt in equal installments over 10 years. Currently, under most IDR plans, students pay no more than 10 percent of their income (minus an allowance for other related expenses). Borrowers receive forgiveness on any remaining balances after 20 years on most plans, though the newest one requires graduates to wait 25.
President Trump’s proposal, however, sets loan payments at 12.5 percent of students’ income. Undergraduate borrowers would receive forgiveness after 15 years (five years sooner), while graduate borrowers would have to wait 30 years (five or 10 years longer, depending on which plan you compare it to now). According to the Administration, this new payment structure change would save the government an estimated $76.4 billion.
At its heart, the IDR change is about one thing: a desire to limit loan forgiveness for graduate borrowers in particular. As mentioned, the concern here is that, in its current form, the program allows graduate borrowers to accumulate, and have forgiven, substantial amounts of debt while they go on to make reasonable middle-class salaries.
Debates over the accuracy of cost projections for these programs have also helped fuel this perception that too much money from tight federal budgets is being used to forgive loans for students who are seen as less needy than low-income undergraduate borrowers. For this same reason, last year’s presidential budget request included a sensible proposal for IDR that would have kept graduate forgiveness at reasonable levels without requiring punitive repayment terms. For example, that proposal would have extended forgiveness for graduate borrowers to 25 years but only required them to pay 10 percent of their income. It would have limited the amount of debt that could be forgiven through Public Service Loan Forgiveness, but kept it around for all types of borrowers.
Trump’s budget fails to strike that balance. It emphasizes cuts over sound policy to wring as much money out of students as possible. Requiring three decades for forgiveness while also asking borrowers to pay more each month undermines the role of IDR as a real safety net for borrowers.
And the bad news is that this IDR repeal might have an actual chance of passing, given the potential savings are so large. In 2010, Congress used savings from unnecessary student loan subsidies paid to banks to help pass part of the health care bill through a special legislative vehicle that could not be filibustered in the Senate. These loan forgiveness savings could potentially play a similar role in attempts to undo the Affordable Care Act this year.
To make matters worse, although the IDR proposal has attracted the most interest, it is actually not the most damaging aspect of Trump’s higher education budget. The budget would also end for new borrowers the Subsidized Stafford loan program that provides 6 million students a year with loans that do not accumulate interest while they are still in school—a change that will cost a student seeking a bachelor’s degree over $5,000—without any plans to redirect that money back to students in a different form. The Administration is also proposing taking $3.9 billion out of the Pell Grant program, which could put these grants for low-income college students at future risk of cuts.
Perhaps most notably, the Trump budget’s approach to IDR (and to other loan repayment programs) also ignores the underlying issue that has made such policies necessary in the first place: the fact that graduate students are taking on levels of debt that their future incomes simply cannot sustain. And these debt levels do not just appear out of thin air. They are a direct function of out-of-control tuition costs. Graduate students pay far higher tuition than undergraduates and get far less grant aid. For example, in-state students majoring in business at the University of Michigan pay $7,470 for undergraduate education versus $29,675 for graduate. Even liberal arts programs there are 50 percent more expensive at the graduate level compared to undergraduate.
With this in mind, the proper policy solution would be instead to tackle debt on the front end by limiting the amount students must borrow in the first place. This can be achieved through smarter lending policies and greater accountability for lenders.
For example, right now, the Graduate PLUS program allows students to borrow up to their annual cost of attendance and doesn’t cap borrowing over their enrollment period. Therefore, some sort of annual or lifetime cap on the program would play an important role in helping to keep debt levels down. Similarly, the federal government currently will lend the same amount on an annual basis for a master’s degree, law degree, and medical degree. Aggregate borrowing limits that differentiate by the level of credential offered (not the individual program) would lessen borrowing for programs that prepare students for fields that may not produce as much earnings.
As mentioned, greater accountability for loan results would help too. One way to get colleges to care more about their pricing and loan outcomes is a bipartisan risk-sharing proposal. One has already been put forth by senators Reed, Warren, Durbin, and Murphy, as well as another by senators Shaheen and Hatch. Such a proposal would hold colleges accountable for a portion of the cost of loans that are not repaid, giving them a direct financial incentive to limit bad outcomes.
Changing income-driven repayment instead of tackling the front-end drivers of debt will simply saddle graduate borrowers with mortgage-length debt while schools face no consequences for the programs and prices that generated the loans in the first place. It takes the easy way out by pushing costs on an unsympathetic—and not politically organized—demographic, neglecting the root causes. Instead, Trump and his Administration should stop trying to use students to generate billions of dollars in savings for millionaire tax cuts and unnecessary border walls.