Trump administration makes major changes to student debt relief program
The Department of Education is seeking to disqualify employers found to have engaged in “unlawful conduct” in new student loan forgiveness regulations.
President Donald Trump’s student loan forgiveness plan may forgive some people but not others, creating uncertainty for borrowers, experts say.
In a big win for borrowers, last month the Department of Education (ED) reached an agreement with the American Federation of Teachers to process student loan forgiveness applications for borrowers who have met the payment threshold for an income-contingent repayment (ICR) or pay-as-you-earn (PAYE) plan for as long as the plan remains in effect. President Trump plans to phase out this plan by July 1, 2028. Income-based repayment plans are also eligible for forgiveness.
The celebratory mood quickly dissipated less than two weeks later when the department released rules criticized for curbing Public Service Loan Forgiveness (PSLF). The rules come into effect from July 1 and allow the ED to exclude pardons for people working in organizations believed to be involved in “criminal activities”.
The nonprofit consumer advocacy group Protect Borrowers said in a statement that the rule would allow ED to target “sanctuary jurisdictions as well as nonprofit organizations that provide assistance to immigrant families, gender-affirming care, diversity and equity in the workplace, and protection of protesters’ First Amendment rights.”
What is PSLF?
Created in 2007, PSLF cancels a borrower’s remaining federal student debt after 10 years of repayment for students who work for “public service” employers, generally defined as government or nonprofit organizations. It is intended to reward people who work in the “public interest,” including firefighters, police, public educators, military personnel, and public health workers.
Why does ED redefine who is eligible for PSLF?
The ED said the eligibility criteria that constitute eligible civil servant employers were not adequately monitored. As a result, certain organizations that “engage in illegal activities that harm local communities or the public interest” are now eligible, the statement said.
“Taxpayer funds should not be directly or indirectly subsidizing illegal activities,” said Education Under Secretary Nicholas Kent. PSLF “is intended to support Americans who dedicate their careers to public service, not to give grants to organizations that violate the law, such as harboring illegal immigrants or performing prohibited medical procedures that attempt to separate children from their biological sex.”
What will happen to PSLF?
PSLF is not over, but the rule is likely to be resolved by the courts after a flurry of lawsuits were filed shortly after the publication of the exposure draft.
Twenty-one states and the District of Columbia sued the Department of Education over new rules limiting PSLF eligibility.
“Public Service Loan Forgiveness was created as a promise to teachers, nurses, firefighters, and social workers that their service to their communities would be honored,” New York Attorney General Letitia James said in a statement. “Instead, this administration has created a political loyalty test disguised as regulation.”
A coalition of cities, unions, and nonprofits across the U.S. also filed suit with similar claims.
How will this affect borrowers?
Experts said to stick to the policy but to act flexibly.
Ken Ruggiero, CEO of lender Ascent, said borrowers should focus on keeping their loans in good standing with consistent payments and maintaining documentation and payment history.
“At the same time, it is wise to build flexibility into your long-term plans,” he said. “Federal forgiveness programs are valuable, but they are also subject to political and legal changes. Think of PSLF as one possible path, not the only path. If forgiveness happens, it’s a big win. But if it doesn’t, we need to make sure we’re still on track for financial independence and don’t rely solely on government discretion for relief.”
Kent Smetters, director of the Penn Wharton Budget Model, said other changes in the ED to student loans next year mean that borrowers should be prepared to pay off even more loans.
If you borrow after July 1st, there are only two types of repayment plans. One is the Standard Repayment Plan, which repays the loan over 10 to 25 years depending on the amount borrowed, regardless of income, and the Repayment Assistance Plan (RAP), which repays 1 to 10% of the borrower’s discretionary income every month.
As an example of how much more a borrower could end up paying, Smetters said, consider a college student borrower with $30,000 in debt at a 6.4% annual interest rate and a starting salary of $45,000 with a 3% annual increase.
- In the most generous SAVE plan, which protects more income than any other plan, this person pays $42 per month in the first year, reaching $116 per month by year 20. The average monthly payment for 20 years will be approximately $75. Total payments over 20 years will be $17,938. However, this is waived as the graduate will be left with a balance of $30,000 in year 20. Unlike some debt forgiveness, this option is not considered reportable income under SAVE. Taxpayers are being asked to pay the remaining balance.
- With RAP, monthly payments start at $169 in year one and reach $519 by year 20. The average monthly payment will be $217. Total payment will be $51,964. The loan is expected to be fully repaid by the end of 2016. Therefore, there is no cost to the taxpayer.
“Many people who would have received significant subsidies under the SAVE plan will no longer receive them,” Mr Smetters said.
How many Americans have student loans?
More than 40 million Americans have student debt totaling more than $1.6 trillion. More than 9 million borrowers could qualify for PSLF, according to Protect Borrowers’ 2022 estimates.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
