On Monday 22 May, the Trump Administration released details of its proposed budget. The budget seeks to cut government spending across a variety of programmes. Among cuts to social programmes and the Environmental Protection Agency, the budget also aims to overhaul the student loan landscape in the US. Changes include removing subsidised provisions from certain federal loans, as well as restructuring repayment and forgiveness programmes. The proposed changes are ambitious; however, it is likely that they will face substantial scrutiny and amendment in Congress before the final budget takes shape.
The US education lending landscape
Education lending in the US is the second largest source of outstanding consumer debt after mortgages and housing lending. In 2016, the US led the World in both absolute (USD1.4 trillion) and per capita (USD4.4 thousand) outstanding education lending balance – well above the next highest country in both categories. Student loans are an inseparable component of obtaining a higher education for the overwhelming majority of Americans. The growing magnitude of outstanding student loans has begun to shape the economic opportunities for many Americans, making it more challenging for graduates to take on other forms of debt, such as mortgages.
The student loan market in the US is largely served through federal loan programmes, with a much smaller portion issued through private lenders. Private loans, which tend to feature higher interest rates and fee schedules, are typically sought by students after they have reached their federal borrowing limit and exhausted other sources of financial aid. Federal loans are guaranteed by the government, and come in both subsidised and unsubsidised formats. While both varieties allow consumers to defer repayment of the loan until after leaving school, interest due on subsidised loans while the student is in school is paid by the government – helping to keep the total cost of the loan lower and facilitating greater affordability for consumers who may otherwise lack the means necessary to pay for their education.
Stripping out subsidies; restructuring forgiveness programmes
The proposed budget makes changes to federal loan programmes, principally through the removal of government subsidised loans and altering payment forgiveness programmes. These changes, if passed, could have a sizable effect on higher education affordability for Americans. The removal of federally subsidised loans, the eligibility for which is determined in part by financial need, would be a particularly challenging development for lower-income students, many of whom already struggle to cover the rapidly growing costs of tuition, books, and fees in American higher education.
The budget also seeks to restructure loan repayment and forgiveness programmes into a more uniform standard involving income-based payment limits and loan forgiveness after 15 years for undergraduate students and 30 years for graduate students. The plan would also remove a programme which forgave student debt after 10 years of work in a qualifying public service job. The impact of these changes would likely be greater for graduate students whose 30 year loan forgiveness term would be on par with the standard home mortgage term in the US, and can incur particularly large debts to pay for the often higher tuition costs associated with specialised schooling, such as medical and law school.
Private lender implications and political hurdles
Restructuring of the federal student loan programme could open up some potential in the relatively small private student loan market. Additional proposed cuts to federal work study programmes and further cuts to welfare programmes will put pressure on the budgets of students who will likely need to turn toward private lenders such as Discover, Sallie Mae, and Wells Fargo to cover funding gaps. For private lenders, student loans can be an attractive value proposition because unlike other forms of debt, they cannot typically be discharged during bankruptcy proceedings – reducing the overall risk for lenders.
The proposed changes in the President’s budget have received criticism from the left for making access to education funding more difficult. Supporters of the changes point to arguments that easy access to federal student loans has created an overly permissive borrowing environment which has contributed to the rapidly increasing cost of higher education in the US. Pushing the budget through Congress, however, will prove challenging. Education funding and student loan debt are major campaign issues for members of both parties, and it is unlikely that the cuts will survive the legislative process in their current form. Nevertheless, the emphasis the Trump Administration has placed on spending cuts should ensure a lively debate over the role that the federal government will play in helping Americans finance their higher education needs.