What You Can Do For Your Country Act
While Trump is angling to eliminate PSLF, Sens. Tim Kaine, D-Va., and Kirsten Gillibrand, D-N.Y., as well as other Democratic senators, are looking to improve the program.
Here are a few key highlights from the What You Can Do For Your Country Act that was proposed in April 2019.
- Forgive 50% of student loan balance at five years: This would be a huge change, as currently it takes 10 years to earn PSLF forgiveness. With this plan, borrowers could have half of their balance forgiven at the five-year mark.
- Count pay ahead payments toward PSLF: This would keep you from being penalized for trying to do the right thing and paying more than you have to.
- Count all types of federal student loan: Its unclear exactly what this would mean. But Democrats want Federal Family Education Loan Program Loans to qualify for PSLF.
- Eliminate the need for income certification: With this plan, every payment would qualify for PSLF. Therefore, there would be no need to annually certify your income.
- Allow self-certification of public service employment: If your employer refused to sign your certification form, you could certify your employment yourself.
- Make 30 hours a week the clear definition of full-time employment: Currently, full-time employment is considered to be 30 hours or whatever your employer considers full-time. With this change, your employers definition would no longer matter.
How does Kaine and Gillibrands proposal compare to Trumps?
Elimination Of The Student Loan Interest Deduction
In the Tax Cuts and Jobs Act, Trump originally proposed eliminating the student loan interest deduction. While it was saved in the final bill, it doesn’t mean that Trump still wants to see it eliminated.
The student loan interest deduction provides up to $2,500 in deduction of the interest you paid on a student loan.
While this is a handy savings, it does phase out at relatively low income levels.
Verdict: Good.
I believe that the student loan interest deduction is a misaligned incentive that doesn’t do anything, but does cost taxpayers money.
Elimination Of Subsidized Student Loans
Trump has also proposed the elimination of subsidized student loans in his 2019 budget proposal. Subsidized student loans provide student loan borrowers with significant assistance – with the government paying for interest accrued during school. This can result in significant savings for borrowers.
The government issued 5.7 million subsidized student loans in the 2016-2017 school year. These loans go towards students with a financial need, based on filling out the FAFSA.
Verdict: Bad.
These loans only go towards students who have a financial need. They will still borrow to pay for college, but now it will be more expensive.
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Elimination Of Public Service Loan Forgiveness
President Trump, along with Betsy DeVos, have called for the elimination of Public Service Loan Forgiveness on several occasions. PSLF is one of the top ways to get student loan forgiveness in the United States.
In his first budget proposal for 2018, he attempted to defund PSLF. This raised a series of legal questions , and eventually the proposal was dropped.
However, in his next budget for 2019, Trump has once again proposed eliminating Public Service Loan Forgiveness.
It’s important to note that the proposed changes would apply to new loans after July 1, 2019. So, it currently appears that those with existing loans would be grandfathered in.
Changes to loans would apply to borrowing after July 1, 2019, not including those loans provided to borrowers to finish their current education.
Verdict: Bad.
You will have fewer people pursuing work in public service, government, law enforcement, teaching, and more. Given many of these fields require a degree, it could be difficult for highly qualified people to get a degree and then work in these lower income fields that are valuable to the United States as a whole.
Student Borrower Bankruptcy Relief Act Of 2019
The Student Borrower Bankruptcy Relief Act of 2019 was introduced by Sen. Richard Durbin, D-Ill., on May 9, 2019.
If passed, this piece of legislation would make it possible for student loans to be discharged in bankruptcy.
While thats technically possible today, borrowers must prove undue hardship to a judge. Opponents to this current rule say that its incredibly subjective. They also find it strange that student debt is treated differently than all other debt in bankruptcy.
Lawmakers and advocacy groups have been calling for student loan bankruptcy reform for quite some time. But so far, Trumps team has remained relatively mum on the issue.
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Eliminating Subsidized Stafford Loans
Eliminating Subsidized Stafford loans has a straightforward effect on those who would lose the benefit. Students leave school with more debt, all else being equal, assuming they borrow Unsubsidized Stafford loans instead. On those loans, interest that accrues during the in-school period is added to the balance when a borrower leaves school. If a student had qualified for the maximum lifetime amount of $23,000 in Subsidized Stafford loans during a five-year enrollment period, losing this benefit means he would have about $3,600 more in debt due to the accrued interest while still in school. Assuming a borrower repays on the standard 10-year fixed payment schedule, he would make $33,856 in total payments over the repayment term without the benefit versus $29,274 with it.22 This equates to an increase of $38 in the monthly payment.
Less than 10 percent of students who borrow Subsidized Stafford loans borrow the lifetime maximum of $23,000.23 Those pursuing shorter-term credentials typically borrow around $7,000 in Subsidized Stafford loans in total and therefore add less than $1,000 in interest to their balances due to the loss of the interest-free benefit, which increases their monthly payments by $11 on a 10-year fixed payment schedule.
Allow Student Loans To Be Discharged In Bankruptcy
This proposal comes from the Department of Education, which announced that it was seeking comments on how to determine “undue hardship” to allow student loans to be discharged in bankruptcy.
It’s important to know the history of this. Before 1998, student loans could be discharged in bankruptcy after the seventh year of repayment. However, after 1998, student loans were prohibited from being discharged in bankruptcy except in cases of “undue hardship”
However, Congress never defined what undue hardship meant, and so the courts have taken it upon themselves to decide – and it’s not always uniform.
Regardless, undue hardship is a very high bar to clear – because you essentially have to prove that you’d never be able to afford your loans, even on an income driven plan, for the rest of your life. Given that income-driven plans offer such low payments based on income, it’s tough to prove.
It’s why many people simply write off the ability to get student loans discharged in bankruptcy, even though it’s theoretically possible.
Verdict: Mixed.
For some borrowers, the ability to get out from un-payable student loan debt would be a blessing. Just read . There are clear cases where student loan debt is un-payable and is an undue hardship.
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Student Loan Discharges No Longer Taxable Income
Section 11031 of the Tax Cuts & Jobs Act fixed student loan discharges by total & permanent disability from being added to the borrowers gross income. Under the new rule, discharge student loans are no longer seen as taxable income if using for disability discharge. This is a hugely advantageous change for disabled borrowers who want to utilize for discharge on their federal student loans. Before many borrowers elected not to apply for discharge and remained in an income-based repayment plan.
Disabled borrowers were hesitant to have their student loans discharged since they would see a massive tax bill expected at the end of the year, which was in many cases uncontrollable. This move made by the Trump administration comes as a tremendous support to disabled federal student loan borrowers.
Eliminate Subsidized Student Loans
Currently, some federal student loans dont accrue interest while borrowers are still in school. To qualify for these subsidized federal student loans, borrowers must demonstrate financial need.
If your family income is too high, you can take out an unsubsidized federal student loan. But Trump wants to do away with subsidized student loans altogether.
According to the nonpartisan Congressional Budget Office, Stafford Subsidized loans have a 10.7 percent subsidy rate. Out of $254 billion in issuance over 10 years, this would cost borrowers $27 billion over 10 years.
Again, this is sure to be an unpopular proposal. It also will have a hard time passing both houses of Congress.
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Pausing Student Loan Payments
Trump:
- First To Pause Payments: Trump paused your federal student loan payments through an executive order for 60 days.
- CARES Act: Trumps executive order became the basis for the student loan benefits in the CARES Act, the $2 trillion financial stimulus legislation that Trump subsequently signed into law.
- Student Loans Help: The major benefits in the CARES Act that stemmed from Trumps executive order include, for example, pausing all payments for federal student loans, setting interest rates at 0% and pausing student loan debt collection through September 30, 2020.
Biden:
- Supports CARES Act: Biden has supported the student loan benefits in the CARES Act.
- Heroes Act: House Democrats have sought to expand the CARES Act through the Heroes Act. The Heroes Act included a proposal to cancel $10,000 of student loans, but it was amended to include less student loan forgiveness.
One Looming Question: Taxes
One major policy and political issue that hangs over the forgiveness discussion is taxes. Debt cancellation isgenerally counted as taxable income. So if someone has $50,000 in student loans forgiven, that would mean $50,000 would be counted as gross income for the year it was forgiven on top of other income.
Under todays tax rates, that would be taxed likely somewhere between 22 and 37 percent. In other words, major student debt cancellation could come with an enormous tax bill for borrowers.
Those who have studied the issue say there are workarounds. John Brooks, a law professor at the Georgetown University Law Center who has studied student debt taxes, told me that there are a number of legal arguments that would allow the secretary of education, the treasury department, and the IRS to make forgiveness tax-free. Forgiveness could get a general welfare exclusion, or qualify as disaster relief, or get a scholarship exclusion, among other options.
Student debt is just really, really weird, and it just doesnt fit into the categories and the ways we think about other kinds of debt, he said. Its a form of government funding for higher education, and its designed to provide as many people as possible with a way to get over some degree of affordability problems thats limiting their ability to enroll in higher education.
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Trump Student Loan Forgiveness
Numerous student loan borrowers are questioning how Donald Trumps methods for dealing with the student loan crisis will change them going forward. In addition, borrowers are also questioning how his decision for Secretary of Education, Betsy DeVos, will require to manage federal student loans in the prospect. While being an outspoken advocate in many areas of study, she has yet to speak the demanding issue of student loans.
Student Loan Repayment Plans
Trump:
- Forgiveness in 15 years: Trump has proposed an income-based repayment plan that would forgive federal student loans for undergraduate borrowers after 15 years of student loan payments.
- Monthly Payment: Under this plan, your monthly payment for federal student loans could be 12.5% of your discretionary income .
- Current Plans: Currently, you can receive federal student loan forgiveness after 20 years or 25 years under existing income-driven repayment plans.
- Forgiveness Sooner: Under Trumps plan, undergraduate borrowers could receive student loan forgiveness five years earlier.
Biden:
- Cancel Student Loans: Biden has said we should cancel at least $10,000 of student loan debt per person.
- Less than $25,000 per year: You would make no monthly federal student loan payments and no interest would accrue on your federal student loans.
- More than $25,000 per year: you would pay no more than 5% of your discretionary income toward federal student loan payments.
- Student Loan Forgiveness: After 20 years, your federal student loans will be forgiven and you wont owe any income taxes on the amount of student loan forgiveness.
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