There’s a lot to like about President Donald Trump’s recent $1 trillion student loan reform plan.
His plan, which includes a new “cancel and wait” provision for new borrowers, has the potential to significantly reduce the number of people who are saddled with student debt.
But it’s also a bad deal for future generations of students and their families.
Here’s what you need to know about the latest student loan reforms.
The ‘cancel-and-wait’ Provision Could Cut Student Debt By Nearly $400 Billion Over 10 Years The “cancellation-and wait” program would essentially let students pay off their loans and refinance their loans for a lower interest rate than the original loan.
Under the plan, borrowers would have the option to wait five years after they graduate, or they could pay off the entire balance of their loans in the first year, with a 10 percent rate.
Theoretically, this should lead to a net reduction in debt for borrowers, since students who owe more money will be able to refinance at lower rates.
The problem is that the program doesn’t take into account the fact that a large number of borrowers who are refinancing will be young adults or under the age of 35, making refinancing an expensive and risky endeavor.
As a result, the program could potentially cost as much as $400 billion over the course of the decade, according to a new report from the Consumer Federation of America (CFA).
The report comes just weeks after a $1.4 trillion student debt relief package was signed into law.
That plan, as well as other initiatives like the Earned Income Tax Credit (EITC) and the Affordable Care Act’s health insurance exchanges, have contributed to a significant drop in the number and severity of student debt, according a study by the New America Foundation.
A report released in March by the National Consumer Law Center (NCLC) found that, in 2017, student debt was at an all-time high of $3.8 trillion, a number that was still up from $2.9 trillion in 2014.
The NCLC noted that this year’s debt would rise by $2 trillion over the next decade due to increased loan defaults and higher student loan interest rates.
“This debt will continue to increase as borrowers default on their loans, which will increase their financial strain as they make their payments,” the report said.
The report also found that the cost of student loans is currently rising at a rate more than double that of other major credit cards, like the FICO credit score. “
With a significant increase in defaults and interest rates, this increase in debt is likely to continue.”
The report also found that the cost of student loans is currently rising at a rate more than double that of other major credit cards, like the FICO credit score.
In 2016, student loan borrowers made up 16.9 percent of all outstanding debt.
That figure is projected to rise to 16.4 percent in 2021, the report found.
That’s a significant jump from a year ago, when just 8.9 million borrowers owed more than $1,000.
In 2020, the NCLC found that $1 million in annual household income was the primary reason for student debt at $3,500, a figure that jumped to $6,700 in 2021.
As of 2018, the average student loan debt was $23,000, according the NCLC.
And with an increase in default rates, it’s hard to see how this program will reduce student debt by much.
“It’s important to note that the $1 billion figure in the report is for debt forgiveness and does not include interest payments,” said Laura E. Hagerty, senior policy counsel for the National Student Loan Settlement Network.
“For refinancing, refinancing increases the likelihood that borrowers will default on the loan and therefore that there will be additional debt.
For the loan to become eligible for forgiveness, a borrower would have to pay a fee equivalent to 10 percent of the principal balance of the loan.”
So, the biggest problem with the “cannibalizing” of student loan refinancing is that it’s likely to increase the debt load on the next generation of Americans.
As students and families struggle to pay for college, the burden of student borrowing will only grow.
The Bottom Line For borrowers who currently owe more than their home is worth, the plan appears to be a good deal.
For families who have already taken out loans, however, refinancings could be disastrous.
“If we were to allow borrowers to refile at a higher interest rate, the total loan balance would probably double over the coming years, according and most likely exceeds $1 for every dollar refinanced,” said Sara W. Wurth, senior analyst at the Center for College Affordability and Productivity, in a press release