Expect These 7 Student Loan Changes In 2018
There are some big changes on the horizon that could impact your student loans.
Here are seven student loan changes to watch for and what you need to know:
1. Student Loan Forgiveness
There is no guarantee that student loan forgiveness will continue in its current form, or at all.
While student loan forgiveness may benefit borrowers, the federal government essentially pays for student loan forgiveness. That means taxpayers may be at risk for forgiving student loans
Current participants in Public Service Loan Forgiveness (10 years to student loan forgiveness) or income-based repayment programs (20 to 25 years for student loan forgiveness) may be expected to be safe for student loan forgiveness, but the future of student loan forgiveness may change.
What It Means For You: While student loan forgiveness may end, student loan forgiveness may not be worth it to student loan borrowers in the long run. You may be able to pay off student loans faster or refinance student loans to save money.
2. Student Loan Repayment
In 2016, President Trump proposed to combine the existing income-driven repayment plans – such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) – into a single plan to make it less confusing for borrowers.
Make sure you understand the difference between student loan consolidation and student loan refinance.
What It Means For You: Remember, federal student loan repayment plans are only for your federal student loans. If you have private student loans – and most people do – you need an action plan to pay off your private student loans too.
3. Variable Rate Student Loan vs. Fixed Rate Student Loan
Student loan rates are increasing.
When you borrow or refinance your student loans, you have a choice between a fixed interest rate and a variable interest rate. There are advantages and disadvantages to each choice.
This year, the Federal Reserve says it will raise interest rates four times this year. Each time interest rates increase, you may pay more for your student loans if you have a variable interest rate student loan.
While this is good news for savers in the form of higher yielding savings accounts, higher interest rates adversely affect consumer borrowers with variable interest rate loans such as student loans (as well as credit card and mortgage debt) in the form of higher interest costs.
If you borrow a new student loan, you should consider a fixed interest rate student loan.
What It Means For You: If you currently have a variable interest rate student loan, you can refinance student loans and convert variable interest rate student loans to a fixed interest rate student loan.
4. Increased Role of Private Sector & Banks
President Trump wants to increase the role of the private sector – particularly private lenders such as banks – in the issuance of federal student loans. Why? Trump believes that the federal government generates too much “profit” from issuing student loans, and wants private sector lenders to participate in federal student loan origination.
What It Means For You: How can student loan borrowers benefit from banks and other financial services companies increasing their participation in student loan origination? There may be several benefits, but prospective student loan borrowers would, at a minimum, be looking for lower student loan interest rates, better customer service and a more simple student loan application process.
5. Colleges & Universities: Financial Responsibility For Student Loans?
The high cost of tuition at many colleges and universities has led students to borrow more to fund the cost of their education. Financial aid, scholarships and other financial support help offset the cost of higher education. However, Trump called on colleges and universities with large endowments to help lower the cost of tuition, or face potential loss of tax exempt status.
What It Means For You: Will there be increased risk sharing and financial responsibility between the federal government and colleges and universities? Currently, there is a mismatch in risk sharing and financial responsibility: colleges and universities set tuition rates, but the federal government assumes all default risk on federal student loans. If the proposal is implemented, tuition rates could decrease and therefore students would borrow less debt.
6. Proposed Legislation
Over the past year, there have been multiple legislative bills proposed in Congress to help alleviate the student loan debt burden. According to the latest student loan statistics from Make Lemonade, more than 44 million Americans owe $1.5 trillion in student loan debt. Student loan borrowers are even asking whether their student loan debt can impact their ability to buy a home.
Here is a rundown of some of these bills:
- Reauthorization of the Higher Education Act: the primary law that governs higher education, including student loans, which is reauthorized every five years
- Private Student Loan Bankruptcy Fairness Act: would allow private student loans to be discharged in bankruptcy
- Parent PLUS Improvement Act: makes changes to Parent PLUS Loans.
- Various Employer-Sponsored Student Loan Repayment Plans: proposals to create incentives for employers to help their employees repay their student loan debt
- Strengthening Communities Act: would provide free tuition at community colleges for two years and other tuition reductions
- REDI Act: would provide interest-free deferment on federal student loans for doctors with medical school debt while in a residency program.
What It Means For You: There are multiple legislative bills in various stages in Congress. Stay tuned.
7. New Student Loan Rates
The interest rates for federal student loans are determined by federal law. Interest rates reset every July 1 and run for one year until June 30. All federal student loans are fixed interest rates loans (although you can refinance student loans to receive a fixed interest rate).
What It Means For You: While these new student loan interest rates affect new borrowers, your variable rate student loans may reset monthly so pay attention to your interest rate.