Americans with federal student loan debt stand to pay more each month with President-elect Donald Trump’s proposal than by enrolling in the Obama administration’s most widely available income-driven repayment plan, Revised Pay As You Earn, according to an analysis by NerdWallet. However, Trump’s proposal could forgive loans sooner, which would help borrowers with lower incomes.
Borrowers with federal student loans are set up with a standard 10-year plan of equal payments each month. It’s the fastest way to repay the debt while keeping interest costs down. But for those struggling with their debt, income-driven plans are an option that caps monthly payments at a percentage of a borrower’s income while also extending the loan term to 20 or 25 years.
Cap on payments
In an October speech, Trump outlined his higher education reform proposals, including an income-driven student loan repayment plan, which would cap payments at 12.5% of a borrower’s income. Trump’s plan resembles REPAYE, the most widely available income-driven repayment plan, which caps payments at 10% of a borrower’s discretionary income, as calculated by the federal government. It isn’t clear if Trump’s plan would apply to discretionary or all income.
Trump also introduced a loan forgiveness proposal that would dismiss a borrower’s remaining debt after 15 years. Currently, borrowers who make regular payments on undergraduate loans taken out on or after July 1, 2014, would see that debt forgiven after 20 years. Those who borrowed before that time would wait 25 years for loan forgiveness.
To compare Trump’s proposal and REPAYE, NerdWallet calculated repayment scenarios for three categories of borrowers with different incomes. Our calculations assumed student loan debt for borrowers at $30,100, the 2015 class average.
- In each income scenario, borrowers would pay more each month under Trump’s proposal than they would if they enrolled in the current REPAYE plan.
- Borrowers with incomes of $40,000 would pay the most each month with Trump’s proposal: a difference of $43 a month compared with REPAYE.
- Only borrowers with an income of $20,000 would see part of their debt forgiven under REPAYE or Trump’s proposal. Borrowers with higher incomes would have paid off their loans before the forgiveness timeline kicks in for either repayment plan.
Read more about the results and full methodology of the study here.
Another way to save on payments
Another repayment option to consider is student loan refinancing, under which a borrower combines multiple federal loans into a new private loan, ideally with a lower interest rate and thus saving money each month. Refinancing is best suited for borrowers with high incomes and strong credit scores.
However, by refinancing your federal loans, borrowers lose out on certain federal loan protections, including forgiveness. Be sure to weigh your options before making changes to any loans.
Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @AnnaHelhoski. Victoria Simons is a data associate at NerdWallet. Email: [email protected].