Trumps tax bill makes big changes to student loans and financial aid

Lower loan limits. Fewer repayment options. A 30-year path to forgiveness. New Pell restrictions. Those are among the major changes coming to the federal student lending program under measures Republicans included in their sweeping tax and budget bill that passed the House early Thursday. The legislation is designed to rationalize the government’s famously convoluted education loan program while saving around $351 billion. Unlike the current system, the overhaul would require pretty much every borrower — including the lowest earners — to at least make small payments toward their loans, and they would have a narrower chance of getting their debt canceled. "It’s no secret that colleges have exploited the availability of uncapped federal lending and generous forgiveness programs to raise prices rather than improve access and affordability,” Rep. Tim Walberg, who chairs the Education and Workforce Committee, said at an April 29 hearing. “Streamlining loan options as done in this bill will increase affordability for students and families as well as curtail the extent to which schools use taxpayer dollars to line their pocketbooks by loading students up with debt they can’t repay.” But some outside experts have suggested that the reforms, including a complicated new system for determining how much students can receive in aid each year, could end up making aspects of the loan program more confusing for families, while also limiting access to federal aid for many lower-income students. The student loan program has become notorious for its baffling array of repayment plans, which have accumulated over time as previous administrations have stacked new, more generous options atop one another. Those choices have been made messier by federal court rulings that blocked all or parts of some plans over the past year. President Biden’s SAVE plan, for instance, is entirely on hold, as are the loan forgiveness features of Pay As You Earn and its successor, REPAYE. The GOP bill would prune the system to just a pair of options — one standard plan, and one linked to income — both designed to make monthly payments manageable for borrowers. The new standard plan would still require fixed monthly payments. But instead of automatically being placed on a 10-year repayment schedule, like in today’s program, former students would have between 10 and 25 years to pay down their debts depending on how much they borrowed — similar to how federal consolidation loans work today. Meanwhile, the alphabet soup of plans that currently set payments based on a borrower’s income — ICR, IBR, PAYE, REPAYE, and SAVE — would be slimmed down to a single option. The new Repayment Assistance Plan will require participants to pay between 1% and 10% of their income toward their loans, with higher earners owing more. Notably, the bill would ban the Secretary of Education from modifying the two new plans, so a future president couldn’t make their terms more lenient. “I’d say this step toward simplification is a massive improvement when it comes to making these programs understandable to the general public,” said Beth Akers, an education expert at the right-leaning American Enterprise Institute. The new Repayment Assistance plan is in some ways less generous than some of the options that have been available until recently. For instance, current income-driven plans drop monthly payments to $0 per month for the lowest earners. The new proposal would require a minimum $10 monthly payment. Instead of forgiveness after 20 or 25 years, the new plan would require 360 on-time payments, or essentially 30 years. The reforms also eliminate subsidized loans, which don’t begin charging interest until repayment begins, as well as forbearance and deferments for unemployment and economic hardship. Still, the new income-linked plan would have some borrower-friendly features. For instance, the government would waive unpaid interest each month instead of adding it back to a borrower’s balance, as long as enrollees make their minimum payment. It would also offer matching principal payments of up to $50 a month and make payments lower for parents. The bill would not change the way interest rates are calculated. There’s at least one quirk of the Repayment Assistance Plan that could frustrate a few participants. Because of the way payments increase with income, there’s a chance some borrowers may end up losing money if they get a small raise, because their payment could theoretically go up more than their earnings — the sort of phenomenon income tax brackets, for instance, are designed to avoid. A spokeswoman for the Education and Workforce Committee suggested that borrowers in that situation wouldn’t necessarily be losing money, since they’d save on interest by paying their loans faster. What about borrowers who already have loans? Some could end up with higher monthly payments. The proposal would terminate SAVE, PAYE, and REPAYE and transfer them into the existing Income-Based Repayment plan, with monthly payments set at 15% of discretionary income, and offer forgiveness after 20 years for undergraduate debt and 25 years for graduate student loans. PAYE and REPAYE had offered monthly payments at 10% of discretionary income. Under the new program, many Americans would be able to borrow significantly less for school. For undergraduates, the lifetime Stafford Loan limit would be set at $50,000, higher than the current $31,000 cap for dependent students, but lower than the $57,000 cap for those who are independent. At the same time, Parent PLUS loans, which today are uncapped, would max out at $50,000 per parent across all of their children. Grad PLUS loans, which allowed unlimited borrowing for advanced degree programs, are getting the ax entirely. Instead, borrowers will be limited to $100,000 in loans for graduate programs and $150,000 for professional programs. The caps are meant to tamp down on rampant tuition inflation and prevent overborrowing, but some experts are concerned they will simply push some students toward private lenders, especially in fields like law and medicine, who charge higher interest rates and offer fewer protections. “It sounds like a massive play to increase the private student loan market,” said Julie Margetta Morgan, president of The Century Foundation and a former Department of Education official under the Biden administration. There are major changes in store for how financial aid eligibility is calculated. Today, that math is based on the cost of attending the school where the student intends to enroll. Under the rule Republicans have proposed, each student’s aid would be based on the median cost of attending a similar program of study nationally. So the aid for an engineering major at MIT would be based on the cost of engineering programs across the country, for instance. The measure is being pitched as a way to help students pick lower-cost programs. "The opaque tuition pricing model used today by colleges and universities is extremely confusing to borrowers and plays a large part in high costs,” said an Education and Workforce Committee spokeswoman. They added that the new aid formula is designed to help students “be more informed consumers when comparing programs at different institutions.” But some experts told Yahoo Finance that they were baffled by how the system would function in practice, or what it would mean for the typical student’s aid package. It’s also unclear if the Department of Education has the data collection capability to manage such a new system, since its statistics team has been cut down to three employees as part of recent layoffs. “I have no idea what it’s going to do,” said Rachel Fishman, director of higher education at the think tank New America. “I don’t think anybody understands what it is going to do.” The Pell Grant program, which provides aid to low- and moderate-income households, would also see an overhaul. Some of the changes would limit access for part-time students. For instance, undergrads would need to be enrolled at least half-time to qualify for any aid and would have to take a full course load of at least 15 credits per semester to receive a maximum grant, instead of the current 12 credits. At the same time, the GOP would make more short-term certificate courses that offer vocational training for workers like truck drivers and nursing assistants Pell-eligible, by lowering the minimum length of a program to 8 weeks from the current 15. Fishman said she was worried that the combined changes would lead to more “stratification” in higher education. “We’re taking away your ability to get a bachelor’s if you’re working on the side, but if you want to get a short-term credential to get a really low-paying job, go ahead,” she said. One thing that won’t be getting a huge overhaul: The Public Service Loan Forgiveness program, which cancels the remaining debt for nonprofit and government employees after they make 10 years of payments. The program has long been a target for conservatives — the Heritage Foundation’s Project 2025 advocated for eliminating it. But the GOP’s bill only makes one change: Payments by medical and dental residents wouldn’t qualify for forgiveness. One of the biggest changes to the lending program would be aimed at colleges themselves. The bill includes a “skin-in-the-game” provision that would essentially put schools on the hook for paying back a portion of their students’ loans if they miss payments and potentially cut them off from federal aid programs entirely. The idea, which has been discussed in Washington policy circles for some time, is intended to create more accountability in higher education without singling out for-profit colleges. But some critics worry that it could disincentivize colleges from enrolling lower-income students, who are at higher risk of failing to pay back their loans. Partly to prevent that, the bill includes a new grant program for colleges that gives them more funding based on a formula that rewards enrolling and graduating lower-income students. To qualify, the colleges would have to offer students a guaranteed maximum price to complete their degree when they first enroll. Still, lobbying associations that represent universities are unhappy with the potential for new penalties, arguing in a recent letter that they would create “enormous negative consequences” that “unduly penalize the very institutions serving the largest numbers of those students who struggle most in the labor market: low income, first generation, and underrepresented student populations.” Jordan Weissmann is a senior reporter at Yahoo Finance. Sign up for the Mind Your Money newsletter Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more Read the latest financial and business news from Yahoo Finance