President Trump’s FY2021 Budget Cuts Funding for Student Loans

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Mark Kantrowitz

By Mark Kantrowitz

February 11, 2020

President Trump’s FY2021 budget proposal (U.S. Department of Education budget summary) slashes funding for student loan programs by $170 billion over 10 years. It does so by ending the Public Service Loan Forgiveness program, by eliminating subsidized Federal Stafford loans to undergraduate students, by reducing loan limits in the Federal Parent PLUS and Federal Grad PLUS loan programs and by requiring borrowers in income-driven repayment plans to pay more.

Overall, the President’s proposals will increase borrower costs by thousands of dollars per borrower, on average. Some borrowers will end up paying double.

The cuts to student loan funding in the FY2021 budget proposal are similar to the cuts previously proposed in the FY2020, FY2019 and FY2018 federal budgets. Congress rejected those proposals. The major change in the FY2021 budget proposal is the addition of new limits on parent student loan borrowing and graduate student loan borrowing.

Ends Loan Forgiveness

The Democratic presidential candidates have proposed expanding loan forgiveness options for student loan borrowers, such as forgiving all student loans, expanding public service loan forgiveness, forgiving the student loan debt of all teachers and restoring bankruptcy discharge of student loans.

President Trump’s budget does the opposite, by proposing to end the public service loan forgiveness program.

Eliminates Subsidized Student Loans

President Trump’s budget proposes to end all subsidized student loans, where the government pays interest during in-school and authorized deferments as well as the grace period.

This will eliminate the subsidized Federal Direct Stafford Loan for undergraduate students. Students will still be able to borrow up to the overall Federal Direct Stafford Loan limits, but only as unsubsidized loans.

Subsidized Federal Direct Stafford Loans for graduate students were previously eliminated in 2012.

The Federal Perkins Loan program ended in 2017.

All remaining federal education loans will be unsubsidized.

Increases Cost of Income-Driven Repayment

President Trump’s FY2021 budget will replace the four existing income-driven repayment plans with a single income-driven repayment plan.

The new income-driven repayment plan will require borrowers to pay 12.5% of discretionary income, up from the 10% required under Pay-As-You-Earn Repayment.

The repayment term will be 15 years for undergraduate students and 30 years for graduate students.

The President’s plan will also increase borrower costs by eliminating the standard repayment cap on monthly loan payments and by adding a marriage penalty. The Trump repayment plan will base the monthly student loan payment for married borrowers on their joint income even if they file separate income tax returns.

Borrowers who have a “severe” delinquency would be automatically enrolled in income-driven repayment.

Adds New Loan Limits on Parent PLUS and Grad PLUS Loans

The budget proposal will add new annual and aggregate limits on parent student loan borrowing and graduate student loan borrowing.

The budget will limit Federal Parent PLUS loans to $26,500, the difference between the current aggregate loan limits for dependent and independent students. If a parent has already reached this aggregate limit, dependent undergraduate students would be eligible to borrow up to the aggregate limit for independent students.

The budget will limit borrowing by graduate students to $50,000 per year and $100,000 in aggregate, in addition to any undergraduate borrowing. This will replace the current Graduate Stafford and Grad PLUS loan programs, with loan terms based on the current Grad PLUS loan.

The budget proposes to provide college financial aid administrators with greater authority to reduce loan limits and to require annual financial literacy training.

These changes would shift some borrowing from federal education loans to private student loans and private parent loans.

Other Changes to Financial Aid Programs for College Students

The budget proposal includes several changes to the Federal Pell Grant program, but would not increase the maximum Pell Grant.

  • Merges the Iraq-Afghanistan Service Grants into the Federal Pell Grant program
  • Expands Federal Pell Grants to short-term programs
  • Makes incarcerated students eligible for Federal Pell Grants
  • Switches the Federal Pell Grant program’s mandatory funding into discretionary funding, making it entirely subject to the annual appropriations process

The budget will also eliminate the Federal Supplemental Educational Opportunity Grant (FSEOG) and cut funding for Federal Work-Study in half.

Unlikely to Be Enacted

The President’s FY2021 budget proposal, which requests $66.6 billion for the U.S. Department of Education, a 7.8% cut, is unlikely to be enacted by Congress.

Federal budget legislation starts in the House, which is controlled by Democrats. Similar proposals could not pass even when Republicans controlled Congress.

If you are struggling with student loan debt, there are ways you can lower your student loan payments, including enrolling in an income-driven repayment plan, temporarily going on a deferment or refinancing student loans to lower your interest rate. Keep in mind refinancing any federal loans into a private loan means a loss in many benefits – income-driven repayment plans, any federal loan forgiveness programs, generous deferment options, and more.

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