President-elect Donald Trump’s decisive victory over Hillary Clinton in the early hours of Wednesday morning might herald a new direction for federal higher education policy. Yet Trump’s most fleshed-out proposal doubles down upon the priorities of the Obama administration. To make student loans great again, Trump will need to revise it.
“Trump has landed on a worthwhile starting point for student loan reform.”
Trump’s proposal, laid out in an October speech, would make more generous income-driven repayment plans for student loans. Currently, the Department of Education offers several optionsfor student borrowers to make payments based on their income, which are aggressively promoted by the current administration. The most common option allows borrowers to cap payments at 10% of their discretionary income, with any remaining balance forgiven after 20 years. If an individual’s payments under the standard repayment plan would be lower than under the income-driven plan, he would pay the standard rate instead of the income-driven rate.
The Trump plan would cap payments at 12.5% of discretionary income, but with remaining balances forgiven after 15 years. This may seem like a tradeoff—a higher payment over a shorter period—but on net it increases the generosity of federal loans. American Enterprise Institute scholar Jason Delisle crunched the numbers, and showed that borrowers with high balances would usually receive generous loan forgiveness, while those with low balances would hardly benefit at all.
Keep in mind that the government is set to lose $170 billion of taxpayer money on the student loan program over the next ten years, according to the Congressional Budget Office’s fair-value estimates. Trump’s plan would increase that total—and do so in a highly regressive way. Individuals with large student loan balances generally have higher incomes, as they have accumulated those debts through earning lucrative graduate degrees. As currently written, the plan would be a major boon to the lawyers, doctors and businesspeople of tomorrow. Those who need the most help generally have low student loan balances, and would not benefit from the reform.
Consider an example. An individual with a relatively low loan balance of $10,000 with a 3.76% interest rate would make payments of roughly $100 monthly under the standard plan. Under the current system, his disposable income would have to be under $12,000 (roughly $30,000 gross income for a single person) to benefit from a payment reduction under an income-driven system. Under Trump’s alternative, though, his disposable income would have to be under $9,600 ($27,400 gross). Fewer low-income individuals would be able to take advantage of the program, and those who still could would face higher monthly payments—25% higher, to be exact.
However, Trump has landed on a worthwhile starting point for...
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Preston Cooper is a fellow at the Manhattan Institute's Economics21. Follow him on Twitter here.
This piece originally appeared in Forbes