Both of these are important questions that may finally be getting early answers. Sadly, those answers are scary for a huge number of student loan borrowers. Reports as of May 2017 are that Trump and DeVos’ initial education budget will seek to eliminate the Public Service Loan Forgiveness program which could cost student loan borrowers billions of dollars. Trump and DeVos will likely seek to eliminate over $700 million in Perkins Loans and massively reduce the amount of work-study programs.
How Trumps New Tax Cuts and Jobs Act Affects Students & Borrowers
On 12/22/2017, the Tax Cuts & Jobs Act was passed into law. Within the 429 page document, there are changes made to existing laws that would significantly affect current students, those with student loans, as well as parents who have dependents on their taxes currently in school.
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Student Loan Discharges No Longer Taxable Income
Section 11031 of the Tax Cuts & Jobs Act modified student loan discharges through total & permanent disability(TPD) from being added to the borrowers gross income. Under the new law, discharge student loans are no longer seen as taxable income if applying for disability discharge. This is a hugely beneficial change for disabled borrowers who want to apply for discharge on their federal student loans. Previously many borrowers elected not to apply for discharge and remained in an income-driven repayment plan.
Disabled borrowers were afraid to have their student loans discharged since they would see a hefty tax bill due at the end of the year, which was in many cases unmanageable. This change made by the Trump administration comes as a huge relief to disabled federal student loan borrowers.
One big change presented in the Tax Cuts & Jobs Act is that interest deductions for student loans are being wiped out starting in 2018. Currently, if you are earning under $65,000/yr as a single, or $130,000/yr if you are married and filing jointly, you are eligible for an interest deduction on your student loans of up to $2,500. IRS records show that in 2015 there were 13.4m people who claimed that deduction and the average deduction was $1,100. For someone in the 25% tax bracket, that would translate to a reduced tax liability of $275. It’s not a huge amount, but for a struggling individual out of college trying to make ends meet, every dollar matters.
*This was removed from the final version of the law that was passed.
Graduate Tuition Waivers Will Be Taxed
Graduate students often take up jobs at their university in exchange for a tuition waiver. These grads are often working on research, teaching in a classroom, and trying to earn their graduate degree at the same time. The school will waive a portion of their tuition, most often into the many thousands of dollars for their work. Currently, the IRS does not see that tuition waiver as taxable income. Beginning in 2018, it would. For a graduate who earns a $25,000 tuition waiver and is in the 12% tax bracket, this would result in a tax bill of $3,000 dollars, when they may not even have an actual income. These are students working full time to earn that waiver but may not have any actual REAL income.
*This was removed from the final version of the law that was passed.
American Opportunity Tax Credit Improved
The American Opportunity Tax Credit has been improved by the Tax Cuts & Job Act. This is one of the more popular deductions for student loans that allows up to a $2,500 deduction for qualified education expenses for the first 4 years of higher education. The IRS data show that 9m Americans applied for this tax credit last year. The Tax Cuts & Jobs Act has increased the allowable deduction period to five years instead of four, but the fifth year is at a reduced $1,250 deduction. The deduction is calculated as being 100% of the expenses incurred up to the first $2,000, and after that it’s 25% of the next $2,000 for a max of $2,500.
Lifetime Learning Credit Being Axed
The Lifetime Learning Credit is being repealed, which allows a credit offset of 20% on the first $10,000 of your education expenses. This translates into a deduction of up to $2,000, which could be used for many years as you had education expenses. The big difference between the American Opportunity Tax Credit & the Lifetime Learning Credit is that the latter allows for deductions based on vocational expenses. By removing this tax credit it is hurting those who are looking to improve their skill and gain useful hands-on training in a field that may not be available at a traditional university
If Trump & DeVos take Public Service Loan Forgiveness away, what should borrowers do?
- For borrowers that are eligible for PSLF, immediately ensure that your loans are in the Direct Loan Program (consolidate your loans as necessary)
- If you are in the Direct program already (and eligible for PSLF) certify your employment status immediately.
These steps alone will not ensure that borrowers will receive PSLF, but being in the program prior to any law changes is likely to improve your chances of receiving it greatly.
Trump Signs Budget Including $350m For Loan Forgiveness
In the spending bill passed by Congress in March 2018 to fund the government through September, Congress ignored many of the Trump administration’s budget proposals including doing away with the Public Service Loan Forgiveness Program. Instead, Congress allocated $350 million for the Department of Education to help borrowers with previously unqualified repayment plans gain student loan forgiveness, and President Trump signed it into law. The purpose of the PSLF was to entice graduates to take qualified public service jobs that served the community and to enable forgiveness of all student loan debt for those borrowers after 120 payments over 10 years into an income-driven repayment plan. To normally be eligible for forgiveness under PSLF, you must be on an income-driven repayment plan. The $350 million is earmarked for those who meet all qualifications but were paying into a graduated or extended repayment plan, which are not normally eligible. However, $350 million is unlikely to cover all who apply. This new program is known as the Expanded Temporary Public Service Loan Forgiveness program.
Based on what Trump has said so far, here are his other most concrete views:
- Trump wants to consolidate all current repayment plans into a single Income-Based Repayment program (IBR). This would result in students paying 12.5% of their income toward their loans each month and receive total loan forgiveness after 15 years.
- He has made plans to cover increased forgiveness amounts (and the higher cost to taxpayers) due to shorter repayment terms by lowering federal spending accordingly.
- Trump promises to scale back funding significantly for the Department of Education.
Here are the other stances the Trump administration has taken:
- The government “shouldn’t be making money on student loans”—the logical/only fix to this would be to lower the interest rate for federal loans going forward
- Eliminate the Public Service Loan Forgiveness program (in favor of putting all borrowers into a single IBR)
- Push colleges to cut tuition by reducing large administrative costs
- Reduce federal regulations on colleges to reduce their compliance costs so they can pass those savings along to students
- Universities will be required to spend all of their endowment money going forward on their students (instead of “hedge fund managers”) to keep tuition low and cut student debt or risk losing their federal tax breaks
- Possible tax-exempt status for large university endowments if schools don’t start making their degrees more affordable for students
If he does change the IDR program as he has suggested, those interested in Income-Driven Repayment plans would have a higher monthly payment, BUT forgiveness would occur sooner.
Here are the big outstanding questions:
- No mention of tax implications on forgiven student loan amounts
- No mention of bankruptcy reforms
So how will this affect your student loans going forward? And more importantly, what should you do about it?
Recommendations for Borrowers:
1) Trump is clearly in favor of a single IBR program going forward, which will have a shorter forgiveness period than the version currently in place. If you are in distress or default on your loans, enroll in a current Income-Driven Repayment program (or a loan rehabilitation). If you’re not, it may be best to wait and see what develops with Trump’s stated new version before you enroll. The shorter forgiveness period may end up saving you money over the long-term.
2) Make sure to stay current on your student loans payments and out of default status. This is important because, in the past, new student loan programs have been more difficult for those in default to enroll in. Keeping your loans in good standing is the best way to keep your opinions open going forward.
3) At this point, there is no real knowledge available about how Trump’s student loan policies will affect private loans, if at all. This being the case, it may be best to simply to wait and see what develops. This may offer an opportunity to take advantage of better options in the near future.
Obviously, there are still a lot of questions in the minds of student loan borrowers about how Trump’s future policies will affect them. Rest assured that as things develop, Student Debt Relief aims to provide student borrowers with the most up-to-date information and guidance.
Will Trump forgive my student loans?
While nothing is set in stone, it seems very likely that whatever program Trump implements will have an end of term loan forgiveness as a component. His most recent thinking is forgiveness would be after 15 years of payments.
How do I get signed up for student loan forgiveness?
Make sure your federal loans are enrolled in the direct loan program. If they are not, consolidate them into the direct loan program. If they are Stafford loans you may want to see if you qualify for any of the Stafford forgiveness programs. Here is a complete guide to student loan forgiveness.
Will Trump lower my student loan payment?
You likely don’t need to wait for Trump to lower your payment, you may be able to lower your payment today. Look at Income-Driven Repayment programs and/or private loan consolidations today. Based on his statements so far it is likely he will continue the Income-Driven Repayment program that helps borrowers lower their payment to a manageable size.
Will Trump lower my student loan interest rate?
So far he has not made any definitive statements regarding interest rates, but he has said the Department of Education shouldn’t profit from student loans. One way to make sure they are not profiting would be to lower the interest rate.
Will Trump do away with the Public Service Loan Forgiveness?
He has not stated this directly. However, he has said that he wants to roll all current federal student loan programs into a single Income-Based Repayment program. One can only assume that this would include the Public Service Loan Forgiveness program as well, but this is by no means certain.
Trump’s cancellation of student loan protections may grow the federal government’s involvement.
Under the Trump administration, the Department of Education has removed Obama era protections for student loan borrowers who want to rehabilitate their loans.
By making rehabilitation of privately held loans less attractive, borrowers are more likely to opt to skip rehabilitation and immediately consolidate their FFEL loans into the Federal Direct Loan Program to take advantage of income-based repayment programs. When borrowers take this action, it moves loans from private balance sheets to the federal government.