Americans with student loan debt would pay more money each month on their federal loans under President-elect Donald Trump’s reform plan than when enrolled in the Obama administration’s most widely available income-driven repayment plan, Revised Pay As You Earn, according to an analysis by NerdWallet. However, compared with current repayment plans, Trump’s proposal could forgive loans sooner, which would benefit borrowers at lower income levels, according to the analysis.
Trump released few proposals on higher education during the campaign, but in an October speech in Ohio, he presented a plan to cap federal student loan repayment at 12.5% of a borrower’s income for the period of the loan.
Currently, there are four plans for federal student loan repayments that are income-driven, or set based on a percentage of the borrower’s income. Trump’s proposal can be most closely compared with Revised Pay As You Earn, or REPAYE, the most widely available plan. Under this plan, repayment is capped at 10% of a borrower’s discretionary income — the funds, as calculated by the federal government, that are available for saving or spending on nonessential expenses. Trump hasn’t indicated whether his proposal would focus on discretionary income.
NerdWallet’s analysis compared Trump’s plan with REPAYE although it’s not clear if his plan will replace income-driven repayment plans, including REPAYE, or if it will be another option. See the full methodology of our analysis below.
What is income-driven repayment?
The standard repayment plan for federal student loan borrowers is monthly payments over 10 years — the fastest path to pay off loans. But for borrowers struggling to make payments, there are other options, including income-driven repayment plans. This option caps monthly payments at a percentage of discretionary income, which is about 10% of a borrower’s monthly income. These plans increase the length of loan payments to 20 or 25 years.
One in four federal loan borrowers, holding 40% of all federal loan money owed, are enrolled in income-driven repayment plans, according to a report released in November by the U.S. Government Accountability Office. The reason for this disproportion, according to the GAO, is that borrowers using income-driven repayment plans tend to have higher loan balances, on average, than borrowers in other repayment plans.
Another repayment option — one best suited for borrowers with high incomes and strong credit scores — includes student loan refinancing, which combines multiple federal loans into a new private loan with a lower interest rate. However, borrowers lose out on some protections, such as federal loan forgiveness.
Trump’s plan vs. REPAYE
A more comprehensive higher education plan wasn’t available on Trump’s campaign website after the October speech, and Trump’s transition team didn’t respond to a December request for additional details about his proposal. It’s not clear if his plan’s 12.5% repayment cap would apply to all federal student loan borrowers or only those enrolled in income-driven repayment.
To compare Trump’s plan to REPAYE, NerdWallet calculated repayment scenarios for borrowers at three annual income tiers: $20,000, $30,000 and $40,000, while also accounting for a decade of year-over-year income growth.
We assumed each borrower to hold student loan debt of $30,100, the average for the class of 2015, according to The Institute for College Access and Success. We assumed 81% of the $30,100 debt was federal loans with an annual percentage rate, or APR, of 4.1%, based on data from The Institute for College Access and Success and the U.S. Department of Education. Only federal loans qualify for income-driven repayment.
Given the different income caps — 12.5% for Trump’s proposal and 10% for REPAYE — in every income scenario, borrowers would pay more each month under Trump’s plan than when enrolled in REPAYE. For example, borrowers earning $20,000 a year would pay $8 more every month, on average, with Trump’s plan versus REPAYE. Those who would see the most change would be borrowers with incomes of $40,000, who could expect to pay $43 more a month, on average, under Trump’s plan.
Trump also addressed loan forgiveness in his October speech. Under the current federal repayment system, undergraduate student debt is forgiven after 20 years of regular payments for those who borrowed on or after July 1, 2014, while borrowers with older debt see forgiveness after 25 years. Borrowers in these repayment plans must also pay income tax on the amount forgiven.
With Trump’s proposal, the loan forgiveness timeline would be shortened to 15 years of full payments. It’s not clear if forgiveness would apply to all federal loans or only those on income-driven repayment plans. It’s also unknown if the shorter timeline for loan forgiveness would apply only to those who borrow after the proposal takes effect or if it would be retroactive.
In the loan forgiveness comparison scenario, only borrowers with incomes of $20,000 would see debt forgiven by either plan. Borrowers with higher incomes would have paid off their loans before the 15- or 20-year timeline ends. REPAYE participants making $20,000 a year would have more of their debt forgiven than with Trump’s plan — $35,041 versus $29,543.
But REPAYE enrollees would have to pay off the debt for five years longer than on the Trump plan. Accounting for interest, borrowers will pay more, on average, for federal student loan debt with REPAYE than with Trump’s plan at any income over the life of the loans.
Borrowers earning $30,000 will pay the most on REPAYE versus Trump’s plan: $3,028 more over the life of the debt. By comparison, those earning $40,000 would pay $1,651 more while enrolled in REPAYE than with Trump’s plan. That’s because those who make $30,000 would take longer to pay off debt and incur more interest while making those payments than a borrower with an income of $40,000, who can repay loans sooner.
REPAYE and income-driven repayment
Even though REPAYE caps payment at 10% of a borrower’s discretionary income, there’s no limit on the amount of a monthly payment — as income goes up, the borrower’s payment will also increase. REPAYE isn’t the best option for married couples, since both incomes determine the monthly loan payment — even if each spouse files taxes separately.
In addition to REPAYE, there are three other kinds of income-driven repayment plans offered by the Department of Education. The federal student aid repayment estimator can help you determine the best option for you.
It’s free to sign up for income-driven repayment on studentloans.gov or with your loan servicer, but you must reapply every year. Under all income-driven plans, any remaining balance on your loans at the end of the term is forgiven.
Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski. Victoria Simons is a data associate at NerdWallet. Email: email@example.com.
To compare student loan repayment plans:
We created borrower models for three income tiers: $20,000, $30,000 and $40,000. We assumed salaries would grow 3% year over year for 10 years before hitting a plateau.
We assumed each borrower had student loan debt of $30,100, the U.S. average for the class of 2015. Data are from The Institute for College Access and Success.
We assumed each borrower had debt that was 81% federal and 19% nonfederal. Data are from The Institute for College Access and Success.
We assumed each borrower had a 4.1% APR for federal debt and 9.0% for private debt. Data for the APR of federal loans are from the Department of Education.
We assumed the 12.5% income cap for Trump’s plan would be for discretionary income, as it is with the REPAYE program. Discretionary income is 10% of the total of each income ($20,000, $30,000 or $40,000), minus 150% of the national poverty guideline for a household of one, divided by 12 months.