By Hannah Finnie and Maggie Thompson
Americans can’t afford Donald Trump—literally. The Republican presidential nominee has spent precious little time talking about—let alone proposing solutions for—the student debt crisis, which has left 43 million Americans $1.3 trillion in debt. While Trump has yet to produce any sort of comprehensive plan to deal with the student debt crisis, from what we can infer from his contradictory public statements, any version of a Donald Trump “plan” to address student debt would skyrocket interest rates for borrowers. By privatizing student loans, Trump’s “plan” could increase monthly payments for borrowers by 23.4 to 78 percent, costing borrowers between $7,342 and $24,469 more over the life of their loans. This would deny access to college for thousands, and constitute a giveaway to Wall Street and private lenders—without ever addressing state disinvestment from higher education, the root cause of the student debt crisis.
Private Loans, Prohibitive Costs
Trump has said multiple times that he wants to eliminate the Department of Education, a position that is echoed in the Republican Party platform, which states that “the federal government should not be in the business of originating student loans.” Eliminating the Department of Education’s role in student lending would effectively hand the student loan market over to private banks, where interest rates are high and consumer protections and loan modification options are low.
Take the average borrower in the United States, who currently holds approximately $25,000 in debt. Under the 2014 average federal loan interest rate of 4.75 percent, over 10 years of repayment the average borrower would pay back a little more than $31,000. However, the average private student loan interest rate is significantly higher. Sallie Mae, the largest private student loan bank, lends at an average interest rate of 7.93 percent to borrowers with strong credit scores. If the Department of Education were eliminated and only private loans with an average interest rate of 7.93 percent were available, borrowers would have to pay approximately $5,000 more over the life of the loan—a 16 percent increase. However, these rates are only for Americans that have an average FICO score of 748 and 90 percent are co-signed.
The situation could look far bleaker—and far costlier—for many borrowers with lower credit scores or no co-signer. It’s highly unlikely that the vast majority of federal borrowers would have such a strong credit score or someone else willing to sign on to the loan. Many Americans who otherwise would have taken on federal loans would likely not qualify for private loans with 7.93 percent interest rates. Instead, under a Trump presidency, many borrowers would likely see interest rates in the double digits. A 2012 report co-authored by the Consumer Financial Protection Bureau and the U.S. Department of Education, for example, found that borrowers with worse credit ended up with interest rates between 9.5 and 19 percent. If Trump had his way, new borrowers with lower credit scores could end up paying between $7,340 and $24,470 more over the life of their loan.
Across all 50 states, borrowers who otherwise could have enjoyed the lower interest rates of federal loans would instead have to pay thousands of dollars more over the lifetime of their loans. Borrowers with low credit scores in the District of Columbia would face the most dramatic increase—a jump of over $37,000 in the amount owed over the lifetime of the loan. Of the 50 states, borrowers in Georgia would see the highest jump, with low credit score borrowers potentially paying nearly $29,000 more over the lifetime of their loans.
Outsized Impact for Women, Minorities, and Low-Income Families
Of course, this increased burden wouldn’t affect everyone equally—and for some, it wouldn’t just mean higher costs, but a complete shut-out from the loans needed to finance a college degree. In particular, low- and middle-income families would be disproportionately burdened, thereby exacerbating the impact of the racial wealth gap, because of the difference in how private and federal loans rely on credit checks. For the majority of federal financial aid, including Pell grants and direct loans, no credit check is necessary. For subsidized federal loans, the government further assists low-income borrowers by paying the interest while a student is in school. Private loans, on the other hand, require credit checks, which render families with poor credit scores ineligible for student loans, effectively cutting off the path to higher education for students without high credit scores.
We know that student debt impacts already vulnerable populations more than others. Zip codes with high African American and Latino populations, for instance, suffer disproportionately high student loan delinquency rates. Within minority populations, middle-income families are the ones who default the most on student loans, demonstrating the presence of structural racism in higher education and labor markets. Veterans, despite serving our country, hold higher amounts of student debt than non-veterans, meaning their student debt burdens would increase even more under Trump’s privatization of student loans. Women, too, would face a disproportionately steep increase in their student debt. Women currently make 82 cents for every dollar a man makes—and the numbers are even worse for women of color. The gender wage gap leaves women less able to pay back their loans; indeed, 53 percent of women versus 39 percent of men already have a high student loan debt burden. This means that any increase in the student debt crisis would disproportionately burden women and perpetuate the disparities women face.
Trump’s “plan” to cut the Department of Education, thereby privatizing student loans, would have an outsized effect on vulnerable populations. But that’s not all it would do: eliminating the Department of Education would also entail eliminating Pell grants, a proven and necessary aid for underprivileged students. Eight million low-income students (including a disproportionate number of students of color) currently rely on Pell grants each year to finance their educations. Without Pell grants, low-income students would either have to take out more in loans (with higher interest rates) or would be unable to receive a loan and access school at all. Either way, inequality would only continue to worsen.
By privatizing student loans and eliminating Pell grants, Trump would push higher education out of reach for the very populations who rely on it the most as a pathway to economic stability.
More Loans, Fewer Protections
Trump’s student debt “plan” wouldn’t just significantly increase the total student debt burden, it would also decrease the consumer protections available to borrowers. For example, federal loans offer payment modification options, which allow borrowers to alter their loans loans—consolidating, say, all of a borrower’s smaller loans into one big loan with just one monthly payment. Federal student loan borrowers can also take advantage of programs designed to help keep payments manageable, like income-driven repayment programs and public service loan forgiveness. Private student loans, on the other hand, offer virtually none of these benefits. It’s this lack of critical consumer protections that too often drives borrowers with private student loans into default. And borrowers with private student loans report that they often aren’t given the information they need to avoid default.
Private student loans, in addition to lacking meaningful options for borrowers to avoid default also often contain egregious provisions such as an “auto-default clauses.” These clauses allow private lenders to demand full payment on the entire loan amount if a co-borrower files for bankruptcy or dies. In this scenario, private lenders can automatically place the borrower in default even if they can continue making full, monthly payments.
Political Pandering on Income-Driven Repayment Programs
One of the primary benefits of federal student loans versus private student loans is the suite of income-driven repayment programs that allow borrowers to lower their monthly payments to a set percentage of their discretionary income and then forgive the rest of the loan at the end of a set time period. President Obama expanded these income-driven repayment options with options like Pay As You Earn (PAYE), which allows borrowers to cap their monthly payments at 10 percent of their discretionary income and have any remaining balances forgiven after 20 years of repayment.
Trump’s claim in his October remarks that he will allow all borrowers to enroll in repayment plans that will cap borrower payments to 12.5 percent of their income and forgive the remaining balance after 15 years is suspect at best, given that he is running on the ticket of the Republican party—which has tried numerous times to make income-driven repayment programs less generous. It should also be noted that Trump made this announcement with only 26 days left to go in an election where the youth vote is crucial, and an expansion of income-driven repayment programs in no way fits with his overall “plan” to eliminate the Department of Education and federal loans.
Trump’s October remarks also seemed to suggest that he plans to eliminate Public Service Loan Forgiveness (PSLF), a program that forgives the loans of federal borrowers in public service after 10 years of on-time payments. This would be a crushing blow for the nearly 1 million public servants who have enrolled in the program anticipating loan forgiveness. Given that his campaign has not actually released a plan with any of these proposals, it is difficult to know what he actually intends.
From Public Good To Private Gain
Donald Trump says he wants to make America great again, but for whom? His student debt “plan” represents a give away to private lenders that will ultimately harm borrowers and does nothing to arrest college costs and give students an affordable path to a degree. What’s more, his “plan” does nothing to address state disinvestment in higher education, a major source of the increase in college costs.
Making higher education more affordable and giving students a path to graduate from college debt-free is one of the most important investments we can make as a country—not just to propel our students’ futures, but to jumpstart the entire American economy.
The Millennial generation, America’s largest generation, is already struggling to keep up with exorbitant monthly payments in the wake of the higher-than-average unemployment rates and lower-than-average wages left by the Great Recession. As we delay buying homes, starting families, and making big purchases, the entire American economy suffers. Donald Trump’s student debt “plan” would only increase monthly student loan payments and create new profit for private student loan banks.
Methodology: Our analysis relies on 2013-2014 data from the U.S. Department of Education, which provides a state-by-state breakdown of the number of federal student loan borrowers and the total outstanding federal student loan debt. To calculate the increases in monthly payments at the state level we relied on the state breakdown of data from the Department of Education supplied in the 2014 “Taking Action: Higher Education and Student Debt” report from the White House Domestic Policy Council.
To determine the average federal student loan interest rate, we derived the weighted average across all types of federal student loans using the federal interest rates during the 2013-2014 school year and the program volume report disbursements from the same year. To calculate the increase in the monthly payments of the average borrower if a switch to private lending were to occur, we compared this federal loan average (4.75 percent) to private loan interest rates provided by SallieMae, the largest private student lender, in their 2016 Securities and Exchange Commission filing. The filing indicated that for borrowers with lower credit scores, the average private loan interest rate ranges from 9.5 percent to 19 percent.