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Trump’s student loan reform: Lower college costs, more jobs, and less national debt

(AP Photo/Matt Rourke)

President Donald Trump has delivered on several campaign promises already, and he plans to help the 44 million Americans holding $1.4 trillion in student loan debt next.

Trump’s budget plans to revise income-driven repayment plans to cap monthly payments at 12.5 percent of discretionary income, and forgive undergraduate loans after 15 years and graduate loans after 30 years. This plan — projected to save $76 billion over the next decade — frees undergraduates from debt five years earlier with a 2.5 percent higher monthly payment cap than the current plan.

The budget continues and extends Pell grant funding year-round, incentivizing students to graduate and enter the workforce faster while acquiring less debt. The year-round Pell also offers students a chance for a third semester of support, and Pell aid would be increased by $16.3 billion for 10 years.

The plan eliminates subsidized loans, which is bad for students in the short run, but good for the long-term. The subsidized loan program was meant to pay low-income students’ loan interest while in college, but high-cost colleges widen eligibility range, so colleges capture more loans by raising tuition. Thus, 85 percent of undergraduates borrowers receive subsidized loans.

Researchers found that subsidized loans raise tuition costs more than other student aid. Summarized by the Mercatus Center, taxpayers lose twofold: “[they] face two equally bad outcomes: They are subsidizing millions of dollars in interest for student loans that they shouldn’t have to shoulder, and they likely will pick up the tab for underpaid student loans.” Slashing subsidized loans will lower the cost of college, and students will still be eligible for the same amount of loans.

Other options have been mentioned in Trump’s campaign speeches or in legislation.

One possible change is sharing financial responsibility between colleges and the federal government for student loan defaults. There is currently perverse tuition incentives: universities set tuitions, while the federal government is 100 percent liable for defaults on federal student loans. No wonder college tuition costs and fees have increased 1,120 percent since 1978. Risk-sharing colleges would vet a student’s loans based on their major, college choice, and job prospects, according to a Higher Ed interview with Trump policy director Sam Clovis. This would push colleges to reform programs with low employment and to lower tuition costs.

Another is cutting bureaucratic regulation and forcing colleges to focus their money on students. In an October speech, then-candidate Donald Trump called on high-endowed universities to lower tuition costs, or possibly lose their tax-exempt status. He cited a Vanderbilt University study that found the university spent $150 billion just complying with regulations in 2013-14 and promised to slash regulation to cut tuition costs.

A final option Trump has proposed is restoring private sector lending.  Tighter competition would lower borrowing rates, improve customer service, and simplify the loan application process. Finally, the government would no longer profit off student loans.

The student debt crisis has clogged the American economy, keeping millennials from buying homes, living on their own, saving, and starting businesses. But student loan reform is well on its way, and it does not have to wreck student’s lives or the economy.

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