Editors' pick: Originally published Nov. 15.
Donald Trump may bring back bank and non-bank private lenders to student loan origination if the Department of Education (ED) reduces federal loans available for college. Fewer federal loans would likely drive borrowers to more expensive private loans.
The Republican party's platform states, "The federal government should not be in the business of originating student loans." It adds, "In order to bring down the costs and give students access to a multitude of financing options, private sector participation in student financing should be restored."
Higher ed experts seriously doubt that private loans would ever be cheaper than federal loans, where interest rates are lower across the board. "Republicans have signaled an interest in bringing back banks as middlemen in the school loan program, which would be a costly giveaway that does little to increase access to higher education and affordability," said Mark Huelsman, senior policy advisor at Demos, a New York City-based think tank.
Until 2010, the Department of Education guaranteed federal loans against borrower defaults that were made by bank and non-bank lenders such as Sallie Mae, now known as Navient. The Health Care and Education Reconciliation Act of 2010 removed those guarantees and large banks such as Bank of America, JP Morgan Chase, Citibank stopped originating student loans during the course of the decade. Banks such as PNC, Discover Financial Services and Wells Fargo still make student loans which are more expensive than those made by the Department of Education.
Trump has talked about gearing student loan terms and amounts to the expected income of college graduates once they enter the workforce--something he endorsed in a Columbus, Ohio speech to high school and college students during the last days of the election campaign.
That could be problematic, however. Even if people in STEM fields make more money than playwrights and painters, there are no absolute guarantees of what a student's income will before they get hired and have been on the job long enough to ace some performance reviews.
Also under threat are the federal income-driven repayment programs--income-based repayment, income contingent repayment and Obama's PAYE and REPAYE programs. Trump has proposed capping loan payments at 12.5% of a borrower's income. Balances would be written off after 15 years of on-time payments.
"If borrowers work hard and make their payments for 15 years, we'll let them get on with their lives," Trump said in his Ohio speech, noting that he hears more questions about student debt on the campaign trail than any other issue besides defense.
The devil, however, is in the details, especially if Trump eliminates or reduces cheap federal loans and pushes borrowers toward more expensive private loans.
"Trump has said many times that he wants to shut down or reduce to shreds the Department of Education, and the Republican party platform calls for getting the federal government out of student loans," said Generation Progress' senior policy associate Hannah Finnie in an October 19 blog following Trump's Ohio speech. Letting the private sector back in would lead to restoring guarantees against loan defaults.
"If Trump successfully eliminated federal loans, students would have to borrow from private lenders," Finnie stated. "That means that when their debts were forgiven after 15 years, the government would have to pay back the banks for all that unpaid debt — hundreds of billions of dollars each year in giveaways to Wall Street."
Outcomes could be increasingly worse during the rest of the decade and beyond for new borrowers who are just starting college. "Many would see their interest rates skyrocket," said Finnie once students are forced to borrow from banks. "The average federal borrower currently pays only 4.75% interest. In the private market however, borrowers with (poor or non-existent) credit or no co-signer pay interest rates ranging from 9.5% to 19%. If Trump privatized the student loan market, new borrowers with lower credit scores could end up paying between $7,340 and $24,470 more over the life of their loan."
"Even worse," she said, "many low-income students would lose their opportunity to go to college altogether as banks wouldn't consider them a good bet to lend to, leaving these individuals unable to afford college."
Right now, students who graduate from high school and are headed for college can land a college loan from Uncle Sam with no credit or income check. The argument made by the Department of Education is that these people, who have traditionally been teenagers, have no income and no credit score --and ,ideally, no debt--so that should not be a lending criteria. That may change as student loan origination migrates from the federal government to the bank and non-bank private sector lenders.
This week Ben Carson, one of Trump's opponents during the Republican primary, was identified as a potential secretary of the Department of Education. The 65-year-old Carson, a believer in Creationism and who has stated that Christian home schooling is superior to public education, is a retired neurosurgeon with no experience as an education administrator on any level. On Tuesday he declined an appointment in Trump's cabinet.