Question: Under the Obama IBR program, a person is required to pay 10 % of disposable income. The Trump proposal payment requirement is 12.5%. Obama’s plan offers debt relief after 20 years. The Trump proposal offers debt relief after 15 years.
Consider a single person with no dependents making $50,000 per year. The person has $35,000 in student debt at a 5 percent annual interest rate.
What are the monthly student debt payments under the two plans?
What are the loan payments on a 10-year and a 20-year standard student loan?
What are the income levels where there are no loan payment reductions from IBR compared to a standard 10-year loan and a standard 20-year loan?
Analysis:
The calculations for the monthly payments on IBR loans and traditional student loans are laid out below.
| IBR Payments and Break Even Obama Versus Trump | ||
| Obama | Trump | |
| AGI | $50,000.0 | $50,000.0 |
| FPL One Person Household 2016 Figures | $17,820.0 | $17,820.0 |
| 150% FPL | $26,730.0 | $26,730.0 |
| Disposable Income | $23,270.0 | $23,270.0 |
| Annual Loan Payment as a Percent of Disposable Income | 0.1 | 0.125 |
| Annual Loan Payment for IBR | $2,327.0 | $2,908.8 |
| Monthly Payment IBR | $193.9 | $242.4 |
- The Obama-formula IBR payment is $194. The Trump-formula IBR payment is $242. The Trump proposal would increase IBR monthly payments by 25 percent in this example.
Comparisons of IBR payments to 10-year loan payments are presented below. I have also calculated the AGI level where 10-year loan payment is equal to IBR payment for both the Obama and Trump formulas.
| Obama | Trump | |
| Loan Balance | $35,000.0 | $35,000.0 |
| Interest Rate | 0.05 | 0.05 |
| Traditional Monthly Payment Ten Year | $371.2 | $371.2 |
| IBR Payment – Traditional Payment (Monthly 10-yr) | -$177.3 | -$128.8 |
| Breakeven calculation IBR Versus 10-yr | $71,277.52 | $62,368.0 |
| Check of breakeven calculation | 371.2 | 371.2 |
- Under Obama-formula IBR the borrower in this example with income less than $71k will have a reduced monthly payment compared to a 10-year loan. Under Trump-formula IBR the cutoff is around $62k.
Comparisons of IBR to 20-year loans are presented below.
| Loan Balance | $35,000.0 | $35,000.0 |
| Interest Rate | 0.05 | 0.05 |
| Traditional Monthly Payment Twenty Year | $231.0 | $231.0 |
| IBR Payment – Traditional Payment (Monthly 20-yr) | -$37.1 | $11.4 |
| Breakeven callculation IBR Versus 20-yr | $54,448.14 | $48,904.51 |
| Check of breakeven calculation | 231.0 | 231.0 |
- The potential reductions in loan payments from IBR are really small compared to a 20-year loan. Under the Trump proposal the calculate IBR payment exceeds the 20-year loan payment for this borrower.
Concluding Remarks:
The Trump alterations to IBR are very clever. He offers loan forgiveness in 15 years rather than 20 years. However, in many cases if income for the student borrower rises, the payment on the IBR could exceed the payment on a 20-year loan. In my view, the main objective of the Trump proposal is to reduce the number of people who might claim IBR benefits. The Trump Administration has not been very good to student borrowers.
More on Trump student loan policies can be found here:
http://financememos.blogspot.com/2018/02/president-trumps-approach-to-student.html
And Here:
http://financememos.blogspot.com/2018/02/public-service-loan-programs.html
The Trump plan does offer the possibility of debt relief at an earlier date. The higher IBR payment could reduce the amount of debt relief provided to the student. Forgiven debt is taxed as ordinary income under both plans.
Whether a person is better off under IBR or a traditional loan depends on future disposable income over the course of the loan. This calculation can be impacted by marriage and the IBR decision can alter tax filings. In short, it is impossible for applicants to determine whether they will be better off under IBR or a traditional loan when they are asked to make this decision. Often applicants with little income at the time of graduation simply sign up for IBR because it is the only way they can remain current on their loan.
I am working on alternative simpler debt relief proposals. More to follow.