As Jennifer Spencer began a master’s program in vocal performance, she made sure to heed some well-known advice: Stick to federal government student loans.
In completing the two-year program at Longy School of Music of Bard College in Boston in 2009, Minor racked up $60,000 in debt using six different loans, which required her to pay a total of $800 a month for 10 years following her graduation.
Her decision to avoid private companies’ loans turned out to be a smart move. Federal loans come with a variety of benefits — such as the ability to defer payment or adjust monthly bills based on income — that are rarely available with private loans. And having gone through periods of unemployment and part-time jobs, Minor, now a mother of two, has used the benefits to lower her monthly payments to $500.
Her loans — and those of millions of other students — could be in for a big shakeup in the coming months as President Trump and the Republican-controlled Congress set out to remake the complex business, potentially eliminating benefits and protections that borrowers like Minor depend on.
Lobbyists for private lenders and loan servicing companies are emboldened by the Trump administration, which reflexively disdains regulations and favors market-based solutions. Alarmed by Trump’s agenda, consumer advocates and student groups also are gearing up to fight any efforts to change the government’s role and student debtors’ rights.
Some changes by the Trump administration are already unfolding. The Education Department plans to consolidate the number of federal loan servicing companies from nine to one. Administration officials also have discussed moving the federal loan program from the Education Department to the Treasury Department. Meanwhile, the Trump administration announced plans to roll back two federal regulations aimed at helping borrowers who say they were misled by for-profit colleges.
With other legislative agendas, such as health care, keeping the White House busy for the moment, many of the proposed changes in students loans likely will not be enacted until next year, if ever. But the industry anticipates the role of the private sector — which now accounts for only about 10% of the student loan volume — will increase as Trump asserts his agenda, said Jason Spencer, CEO of Student Loan Relief Comparison, a loan-rate shopping site.
Expanding the private sector’s involvement could trigger a host of unintended consequences, including curbing access and affordability for borrowers with low credit scores, said Kevin Fudge, director of consumer advocacy and ombudsman for the American Student Assistance, a student advocacy group. “My only hesitation is … when you introduce private sector (companies), where do (their) incentives lie?” he said.
About 44 million people in the U.S. hold $1.34 trillion in student loan debt, according to the New York Fed Consumer Credit Panel/Equifax. That’s more than all credit card or car loan debt held by American consumers, a surge that has alarmed economists and left a generation of graduates entering the working world with a heavy financial burden. A graduate of the class of 2016 has, on average, $37,173 in student loan debt, an increase of 6% ifrom 2015, according to data by Mark Kantrowitz, a financial aid expert and publisher of Cappex.com. In 2005-2006, the average was $20,790.
“I don’t feel like your view of reality is really accurate in grad school,” Minor said. “I don’t regret having my degree. But you’re 22. You don’t know anything. I signed up. I’m like ‘yeah, loans, great!’ And I didn’t really know much about loans until I had them and tried to pay them back.”
Here are student loan changes under discussion in Washington, D.C.:
Revising loan forgiveness
Proposal: On the campaign trail, Trump proposed revising the federal loan forgiveness program by having borrowers pay higher monthly payments but getting their debts forgiven sooner. Most federal student loans currently offer several income-based repayment options to borrowers who have modest income. Under these options, borrowers can cap their monthly payments at 10%, 15% or 20% of their income for up to 20 or 25 years. Their loans are forgiven after the designated period if they’ve continued to pay monthly.
Trump says he’d consider allowing borrowers to contribute 12.5% and have their debts forgiven after 15 years. He has yet to release details on what he would do with the current options.
Outlook: It’s not likely given the current make-up of Congress, said Jason Delisle, a resident fellow at the American Enterprise Institute who analyzes student loans. While the proposal would be welcome by students, it would be seen as fiscally irresponsible, he said.
Simply adding Trump’s proposal to the current lineup of forgiveness options also would merely add to confusion, said Allesandra Lanza, director of public relations for the American Student Assistance. “We need to simplify the repayment plans,” she said.
Proposal: Sen. Dick Durbin, D-Ill., and Sen. Elizabeth Warren, D-Mass., have proposed allowing student loan debtors to refinance with federal loans.
Debtors looking to refinance with a lower interest rate can now turn only to the private market since the federal government doesn’t issue refinancing. As a result, federal loan borrowers who refinance lose some of their protection benefits, such as the ability to defer payments and income-based repayment options.
“Millions of borrowers are still stuck paying interest rates at 6%, 8%, 10% and even higher,” Warren said as she introduced her plan in 2015.
Outlook: Republican lawmakers will likely oppose the plan because it could potentially widen the federal government’s role in student loans, said Dash of Credible.com.
Critics say Warren’s plan is nothing more than the federal government doling out lower interest rates without regard to market conditions or students’ credit profiles.
Proposal: Several bills have been introduced in recent months to offer incentives to employers to help pay for their workers’ student loans.
Some companies, including insurance company Aetna, consulting firm PwC, and investment manager Fidelity, already offer student-loan payment subsidies as an employee benefit. But current proposals would offer tax benefits to both employers and employees to spur more companies to follow suit.
Outlook: The idea has supporters from student advocates and Republicans. A bipartisan group of 31 lawmakers introduced a bill in March to allow employers to deduct their contributions to employees’ student loan payments – similar to 401(k) contributions. Employees would receive a tax-exempt benefit of up to $5,250 per year to pay their student loan debt.
“Adding tax relief to the equation could elevate student loan assistance alongside 401(k) contribution as one of the most valuable financial benefits a company can offer its workers,” said Scott Thompson, CEO of Tuition.io, whose technology enables companies to set up the benefit.
Eliminating PLUS loans
Proposal: Some Republican lawmakers are seeking to eliminate the federal government’s PLUS loans, arguing that the Education Department shouldn’t be in the business of issuing loans.
PLUS loans — which once stood for “Parent Loan for Undergraduate Students” — are taken out by graduate students or parents of undergrad students to pay for expenses not covered by financial aid. Critics say students often spend PLUS loan proceeds frivolously.
Another bill introduced in May proposes to discharge parents’ liability on PLUS loans if their children becomes permanently and totally disabled or has severe physical or mental impairment.
Outlook: It’d be difficult to entirely eliminate the PLUS loan programs since students and parents heavily rely on them to supplement financial aid, analysts say.
About 4.6 million borrowers owe $130 billion in PLUS loans, according to data from the Education Department. But there’s little evidence that parents and students waste loan funds on spring break trips or other non-education expenses, John Brooks, a law professor at Georgetown University, said.
“Families don’t take loans out for fun,” he said. “I don’t’ see how anyone benefits from pushing people out of federal loans to the private market.”
Republicans may have an easier time arguing for the elimination of PLUS loans for graduate students, said Delisle of the American Enterprise Institute. Grad students also are perceived to be more responsible borrowers who can better wade through the complexities of private lenders’ terms than undergraduates.
Besides, the private market’s penchant for pricing-in risk can ultimately help students, Delisle said. If the private market gives you a 16% loan, “the market is telling you ‘don’t go’ and that it’s not a good program for you,” he said.
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