If you or a family member are headed off to college this fall, you've probably heard that rates on federal student loans are going up, and that the Trump administration has proposed changing how borrowers repay their loans and qualify for loan forgiveness.
Here's a quick roundup of what you need to know about the increase in student loan rates for the 2017-2018 academic year, and potential changes to income-driven repayment plans and loan forgiveness.
First of all, the Department of Education announced Tuesday that rates on all newly-issued federal student loans will be going up about seven-tenths of a percentage point on July 1, 2017 -- the first increase since 2014.
- Rates for new loans to undergraduates will be 4.45%, compared to 3.76% today.
- Rates on direct unsubsidized loans for graduate students will be 6.0%, up from 5.31% today.
- Rates on PLUS loans for parents and graduate students will be 7.0%, compared to 6.31% today.
Once you take out federal student loans, the rate is fixed for life. But for those who are looking at attending several years of college, it's important to note that rates on new federal loans are adjusted annually, using 10-year Treasury notes as a benchmark.
With many economists forecasting an end to an era of historic low interest rates, incoming freshman could be in for similar rate increases every year they're in college. It's a good idea to be thinking about how those rate increases could increase the cost of earning your diploma.
Cost of rate increases
According to The Institute for College Access and Success (TICAS), students who borrow for college take on about $30,100 in educational debt.
Consider that it costs $36,227 to repay $30,100 in direct unsubsidized federal student loans at 3.76 percent interest under the standard 10-year repayment plan. At the new interest rate of 4.45 percent, you'd be looking at about $1,000 in additional repayment costs, or $37,260 in total.
But lets say there's another rate increase or two over the next several years, and a student graduates with $30,100 in loans at a blended rate of 5.1 percent. That student would pay $48,075 to pay those loans back over 20 years. That's $5,208 more than the $42,867 in total repayment costs they’d be looking at if they’d been able to take all of their loans out at 3.76 percent.
(You can use the Department of Education's repayment calculator to estimate your costs).
The cost increases will be even more dramatic for graduate students, or parents taking out PLUS loans. At the new rate of 7.0 percent, PLUS loans are by far the most costly federal student loans, and borrowers can often qualify for better rates from private lenders.
Keep in mind that while private lenders typically offer a choice of variable- or fixed-rate loans and flexible repayment terms, most don't offer access to income-driven repayment plans or the potential to qualify for loan forgiveness, and student borrowers will usually need a cosigner.
Which brings us to the proposed changes to repayment plans and loan forgiveness put forward by the Trump administration.
Less generous loan forgiveness?
With the goal of simplifying the system and saving taxpayers billions of dollars, the Trump administration has proposed replacing several existing income-driven repayment (IDR) plans with a single new plan.
The new IDR plan -- which would be the only choice for new borrowers taking out loans after July 1, 2018 -- would let anyone having trouble making their monthly payment pay just 12.5 percent of their discretionary income, compared to 10 to 15 percent in the most popular existing IDR plans.
After 15 years of payments at that level, most borrowers would qualify to have their remaining balance forgiven. That compares to 20 to 25 years under existing IDR plans.
Anyone with graduate school debt, however, would not qualify for loan forgiveness until they'd made 30 years of payments. This, coupled with higher rates on graduate school loans, would mean a significant reduction in the number of borrowers with graduate degrees who could qualify for loan forgiveness.
Parents taking out PLUS loans would not qualify for the new IDR program, or loan forgiveness. The lone IDR program currently available to parents who consolidate PLUS loans -- Income Contingent Repayment (ICR) -- is not as generous as plans like IBR and REPAYE. But "it is a valuable lifeline" for those who need it, said Persis Yu, director of the National Consumer Law Center's Student Loan Borrower Assistance Project.
Even more controversially, the Trump administration proposes closing the door on Public Service Loan Forgiveness for new borrowers. PSLF allows borrowers who choose careers in government or with non-profits to qualify for loan forgiveness after 10 years of payments.
Together, these changes to IDR programs and Public Service Loan Forgiveness would save $104 billion over the next decade, according to estimates put together by the White House Office of Management and Budget.
Another $38.9 billion in savings would come at the expense of families who qualify for need-based federal direct subsidized loans, which don't rack up interest while borrowers are still in school. The Trump administration proposes eliminating that subsidy.
Congress may balk at adopting all of the Trump administration's proposed changes to student loans, which were put forward as a starting point for negotiations in the administration's budget proposal.
In addition to the National Consumer Law Center, groups expressing reservations (or outright dismay) about the proposals put forward in the budget included New America, Student Debt Crisis, and TICAS.
But before the budget was rolled out, a number of high-ranking Republican Congressional leaders had voiced concerns about the projected cost of providing loan forgiveness to so many borrowers.
As of Dec. 31, 2016, more than 6.5 million Americans with $333 billion in student loan debt were enrolled in IDR programs, and the government could end up providing more than $100 billion in forgiveness to those borrowers alone.
Researchers Jason Delisle and Alexander Holt have characterized the programs as disproportionately benefiting doctors, lawyers, and other borrowers with graduate and professional degrees who earn healthy incomes.
Given those long-standing and widely shared concerns, Delisle and Holt were surprised at the reaction to the Trump administration's proposals.
"The Trump budget is a clear win for the vast majority of middle- and low-income borrowers who take out loans for any type of education except a master’s or professional degree," they commented in a piece for the American Enterprise Institute. "It’s also more progressive than the current design, phasing out benefits for undergraduates who go on to earn higher incomes."
Still, they lament, "you won’t catch left-of-center advocates admitting this is a good deal for anyone."
Stephen Dash is the founder and CEO of Credible.com, a marketplace for student loans and student loan refinancing.