How might Student Loans be Impacted during a potential Second Term for Trump?
As the Trump administration prepares to take over the White House in January 2025, many student loan borrowers are inquisitive about the upcoming changes. Some are particularly concerned about Trump's intentions to abolish the U.S. Department of Education and his past remarks on student loan forgiveness.
Despite the Biden Administration's efforts to aid student loan borrowers, the outcomes have been varied. The administration's continuous attempts to erase student loan debt have led to continuous turmoil, and signature programs like the Affordable Education Opportunities (AEO) income-driven repayment plan are currently being deliberated in the courts.
What will Trump's second term mean for future student loans and present student loan debt and repayment plans? Although nobody has a crystal ball, most experts believe future student loan forgiveness will be limited.
Possibility of Eliminating the U.S. Department of Education
President Trump has repeatedly expressed his intention to terminate the U.S. Department of Education, but dissolving a government agency requires an act of Congress. Regardless, it's still plausible that this could happen considering Republicans hold the majority in both the House of Representatives and the Senate.
Financial advisor Dr. Constance Craig-Mason, MRFC®, NSSA®, from Concierge Financial Advisory suggests that if the Dept. of Education ceases to exist, federal oversight of student loan programs could be transferred to other agencies. This could result in numerous problems, including the risk of "creating a hodgepodge system with inconsistent policies, fewer borrower protections, and increased administrative challenges."
However, if the Dept. of Education ceases to exist, it's likely most borrowers won't experience significant changes in the short term. For instance, existing contracts with loan servicers like MOHELA would merely transfer to the new federal agency (likely the Department of Treasury).
Long term, however, there may be other modifications for student loan borrowers.
Alterations to Student Loan Forgiveness
There's a strong probability that the AEO income-driven repayment plan will be struck down by the courts in the coming months. Senior Policy Analyst Megan Walter of the National Association of Student Financial Aid Administrators (NASFAA) advises that borrowers should anticipate some modifications to the availability of forgiveness plans in the coming years. However, she states that expected changes to existing programs like Public Service Loan Forgiveness (PSLF) should only apply to new applicants (and not to borrowers currently utilizing them).
Walter highlights that Trump proposed terminating the PSLF program and suggested significant changes to IDR plans as part of broader student loan reforms during his 2016 administration. Although these proposals never materialized, it's likely there will be renewed efforts in the same direction.
For example, Trump suggested consolidating multiple income-driven repayment plans into a single plan in his fiscal year 2017 budget proposal. The proposed new IDR plan would have required monthly payments of 12.5% of discretionary income instead of the 10% some plans require now (or the 5% discretionary income for undergraduate loans that applies under the AEO plan). Trump's suggested proposal also lengthened the loan forgiveness timeline for graduate loan borrowers to 30 years and shortened the term to 15 years for undergraduate loan borrowers.
In a similar vein, Republicans in Congress are proposing the College Affordability Act which would alter repayment programs and loan forgiveness programs as well.
Renewed Emphasis on Private Student Lending
Trump's previous statements on student loans and his proposed end to the U.S. Department of Education may also signify a shift toward relying less on the government to support higher education funding. Walter indicates that the Trump administration has shown interest in moving the federal student loan system toward private lending, under which time-based forgiveness, or forgiveness in any form, is not typically available.
Private student loan companies have long offered loan options for both undergraduate and graduate-level education, so this is nothing new. However, this change could lead to additional losses for borrowers since private student loans come without the protections federal student loans offer, including deferment and forbearance.
Reduced Interest Rates for Federal Student Loans
Professor Robert R. Johnson, Ph.D. of Heider College of Business at Creighton University suggests that borrowers should anticipate a modest decline in interest rates on new federal student loans in the upcoming administration. This is because student loan interest rates are tied to broader market interest rates. Further, the outlook over the near-term is for lower interest rates throughout the capital markets.
It's also possible that federal student loan interest rates will drastically decrease if one Republican Congressman gets his way. A bill from Rep. Mike Lawler (R-NY), called the Affordable Loans for Students Act, aims to automatically reduce interest rates to 1% for both existing and new federal student loans.
It remains to be seen if this bill will gain the full support of Congress, but keep in mind that this proposal is being offered as an alternative to typical forgiveness plans offered through the Biden administration.
What Should You Do Now?
If you have federal student loans in limbo and you're worried about the future, there's nothing you can do right now other than prepare for the inevitable. With little political appetite for student loan forgiveness in the incoming Trump administration, you'll need to be ready to make payments on student debt for at least the next four years.
If you're signed up for the AEO income-driven plan and your payments are currently paused, for example, you should start budgeting for monthly loan payments so you can resume them as soon as possible. If you're currently repaying loans on any other repayment plan, you should continue making room for these payments into the future.
If you're preparing for college and haven't secured funds for your education yet, it's wise to consider the political landscape as well. According to Bill Townsend from College Navigator, he suggests borrowing the minimum amount to lessen your future loan repayments and financial responsibility. Furthermore, Townsend advises to evaluate prospective professions and their associated salaries, ensuring you can manage the financial burden of your chosen education.
You might also want to explore various types of institutions, such as those offering more budget-friendly options. These could include local and community colleges in contrast to more costly out-of-state public or private schools.
Under the potential changes during President Trump's second term, the availability of student loan forgiveness might be limited due to his past proposals and the Courts' decision on the Affordable Education Opportunities (AEO) income-driven repayment plan. Additionally, the elimination of the U.S. Department of Education could lead to changes in the federal oversight of student loan programs, possibly resulting in inconsistent policies and fewer borrower protections.