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Trump's budget proposes major changes to student loans

President Trump released his proposed budget for 2018 on Tuesday that includes a $3.6 trillion cut in government spending over the next decade. Proposed changes to current education programs could impact financial aid and access to loans and repayment options for millions of students across the nation.  

The budget, which will have to be approved by Congress, calls for $9.2 billion in spending cuts to education for grades K-12 and higher education. Here’s how Trump’s proposed budget would impact student loans.

Fewer loan repayment options

The proposed budget calls for streamlining the student loan repayment process by offering a single plan that caps monthly payments at 12.5% of discretionary income. If payments are made consistently, the loan balance for undergrads will be forgiven after 15 years. Graduate school debt will be forgiven after 30 years.

Currently, monthly payments for federal student loans are capped at 10% of your income and are forgiven after 20 years. There are also a handful of different repayment options for federal loans, ranging from the standard 10-year term to income-driven repayment (IDR) plans.

Having a single repayment plan would make things less confusing for borrowers, but some critics are concerned that raising the income cap could lead to even more defaults.

“Changing the cap from 10% to 12.5% could be difficult for some,” said Miranda Marquit, financial expert with Student Loan Hero, an online resource for student loan borrowers. “If you’re already living paycheck to paycheck, raising that cap on the income limit could have a negative outcome on your budget.”

According to the Department of Education, 8 million federal student loan borrowers have fallen into default because they didn’t make their monthly payments on time. In an analysis published this month, the Consumer Financial Protection Bureau (CFPB) found that even after they clear default, about half of the highest-risk borrowers will default again within three years if they aren’t enrolled into an affordable repayment plan. With just one repayment option, the Trump administration’s proposed budget would do little to address the growing number of borrowers who default on loans.

Farewell to loan forgiveness

The proposed budget would also do away with the public service loan forgiveness program enacted by President George W Bush. Under this plan, student debt is erased if the borrower has remained employed by the government or a qualifying nonprofit for 10 years. Many of the half-a-million professionals who qualify for this program are teachers, lawyers and doctors.

The first people to benefit from this program will have their loans forgiven in October 2017. In the proposed budget it says, “all student loan proposals apply to loans originated on or after July 1, 2018,” so it’s unclear if the public service loan forgiveness will be gradually phased out, or canceled on that date.

An end to subsidized loans

The proposal would also put an end to the federal government subsidizing student loan interest.

As it stands, there are two types of federal loans available for students — subsidized and unsubsidized. If a borrower has a subsidized loan, the government pays the loan interest while the student is in school. With an unsubsidized loan, interest accrues while you’re in school, and is added to the amount you owe upon graduation.

Subsidized loans are given based on need, and without them, low-income students would be responsible for even more debt. “For the students that need help to advance themselves, it will hurt them the most,” said Marquit.

More access to Pell Grants

Pell grants can be a huge benefit for college-bound students with financial need because they don’t have to be repaid. The proposed budget would expand access to Pell Grants by making them available year-round; right now they’re available in the spring and fall. This would boost Pell Grant aid by $1.5 billion, benefiting 900,000 students.

Fewer loan servicers

While not included in the proposed budget, the Department of Education recently made an announcement that would affect student borrowers. On May 19, the DOE announced that federal student loan servicing would soon be handled by one company, which will take on billions of dollars of outstanding student loan debt. Nine companies currently manage student loans for the federal government.

In an official statement, Secretary of Education Betsy DeVos said the move was done to make the system more efficient for borrowers. “The federal student loan servicing solicitation we inherited was cumbersome and confusing—with shifting deadlines, changing requirements and de-facto regulations that at times contradicted themselves,” said Devos.

According to DeVos, the change will save taxpayers more than $130 million over the next five years, and borrowers will enjoy a more user-friendly loan-servicing interface. The amendment will not affect repayment plan requirements.

Marquit agrees that having fewer servicers would help to streamline the process, but says another option could be just as efficient.

“The federal government could just give guidelines to all of the servicers managing federal student loans,” she said.  “It would be an easy fix.”

More from Yahoo Finance:

Brittany Jones-Cooper is a reporter at Yahoo Finance. 

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