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Trump vs. Clinton: Which Student Debt Plan Is Better for Grads Who Face Higher Debt Than Income?

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Although Hillary Clinton and Donald Trump are both offering student debt solutions that are better than the current student loan repayment system, in the end, Clinton comes out on top.  Looking at the estimated savings of each plan in the ten cities with the highest amount of student loan debt compared to annual earnings, Clinton’s plan beats Trump’s 9 to 1.

Student loan debt – at more than $3,000,000,000,000 – is a pressing issue in the U.S. The old rule of thumb, that students should borrow no more than about one year’s income, has gone right out the window. The combination of higher costs and limited job market has created a real struggle for some to pay their bills.

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One solution to the heavy burden of student loan debt is the government’s implementation of income-driven repayment plans. These repayment plans help in the short term by allowing for a more affordable monthly payment, but they can have dangerous long-term consequences. Both Clinton and Trump have proposed plans that would lessen the burden of student loan debt in the long term, potentially saving borrowers tens of thousands of dollars.

The problems with current income-based repayment plans

incomebaseddebt

Image Source: http://bit.ly/2fkmoE8

The income-driven repayment plans currently available for federal student loans are a great short-term solution. Many of the options cap monthly payments at 10% of borrower’s discretionary income.

Unfortunately, depending on the loan balance and income, that cap might lead to a payment amount that does not cover the interest that accrues each month. For example, if the loan accrues $100 in interest in each month and the monthly payment is $75, the loan balance will have grown $25 that month. This borrower will see his loan balance rise even though he’s making the required monthly payment.

Income-based repayment plans generally allow the remaining balance to be forgiven after the student has made scheduled payments for between 20 and 25 years, depending on the plan. On the surface that sounds great. It would mean relief for that borrower in the example above whose loan balance stubbornly refuses to go down. Not exactly. Current tax law views the forgiven amount as taxable income. If for example, you make $50k per year and you end up having $20k in student loans forgiven, you will be taxed as though you earned $70k. This gotcha could even push you into the next higher tax bracket.

The benefits of Hillary Clinton’s student loan plan

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Hillary Clinton’s plan aligns with the current plan by capping payments at 10% of discretionary income and offering loan forgiveness after 20 years. Where her plan differs is that she would allow borrowers to refinance their loans to current rates and still be eligible for income-driven repayment plans.

The repayment plans currently in place allow borrowers to consolidate their loans and continue to be eligible for income-driven repayment. However, the only options for refinancing are with private institutions which do not participate in the federal income-driven repayment plans. In other words, if you refinance to a lower rate, you could save money on interest but you lose all of the benefits that come with federally guaranteed loans.

Donald Trump’s plan will cost borrowers more in the short term, but might save them thousands overall

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Image Source: http://bit.ly/2fjWlKI

Donald Trump’s plan doesn’t allow for refinancing, and he cuts the repayment term to 15 years instead of the current 20-25. His plan raises the monthly payment cap to 12.5%. Even though in the short term out-of-pocket outlay would be higher, over the long-term the amount of debt forgiven, if any, would be significantly lower than they would under the current repayment plans, and the shorter repayment period means lower interest charges over the life of the loan.

How Clinton’s and Trump’s plans help grads in 10 cities with the highest amount of student loan debt compared to annual income

Looking at current repayment plans with an average interest rate of 6.5% and assuming no increase in income, we calculated the amount of student loan debt that would be forgiven under the current, Clinton, and Trump plans. Under Clinton’s plan, we estimated the amount that would be forgiven using an average interest rate of 4.79%.

For a more detailed explanation of how we calculated these numbers, please see the methodology below.

1. Nashville, TN

  • Average Student Loan Balance = $52,253
  • Average Earnings for Bachelor’s Degree Holders = $42,016

Nashville, TN | http://bit.ly/2fhHUp6

Nashville, TN | http://bit.ly/2fhHUp6

  • Amount of student debt forgiven under current plans = $83,316 to $99,619
  • Amount of student debt forgiven under Clinton plan = $31,092
  • Amount of student debt forgiven under Trump plan = $55,958

The country music capital would benefit from Clinton’s plan the most. Under Trump’s plan, borrowers will face nearly 80% more taxable income at loan forgiveness.

2. Dayton, OH

  • Average Student Loan Balance = $43,144
  • Average Earning’s for Bachelor’s Degree Holders = $33,762

Dayton, OH | http://bit.ly/2f1UlpW

Dayton, OH | http://bit.ly/2f1UlpW

  • Amount of student debt forgiven under current plans = $83,883 to $105,263
  • Amount of student debt forgiven under Clinton plan = $43,202
  • Amount of student debt forgiven under Trump plan = $58,165

While Dayton, OH is one of the cities with the most student loan debt compared to annual income, Dayton is also one of the cities with the lowest student loan debt. Again, Clinton wins. The city’s residents would face a tax bill 24% lower under Clinton’s plan.

3. Richmond, VA

  • Average Student Loan Balance = $52,810
  • Average Earning’s for Bachelor’s Degree Holders = $42,499

Richmond, VA | http://bit.ly/2ezZt41

Richmond, VA | http://bit.ly/2ezZt41

  • Amount of student debt forgiven under current plans = $74,414 to $84,227
  • Amount of student debt forgiven under Clinton plan = $39,048
  • Amount of student debt forgiven under Trump plan = $55,893

Richmond, VA could use student loan debt relief. Richmond is one of the ten cities where residents struggle to pay their bills, 4.23% of accounts are late, and 67% of those late accounts are education loans. Clinton’s plan would save residents 43% over Trump’s. Additionally, Clinton aims to provide more avenues for borrowers to rehabilitate loans in default.

4. Birmingham, AL

  • Average Student Loan Balance = $60,184
  • Average Earning’s for Bachelor’s Degree Holders = $39,868

Birmingham, AL | http://bit.ly/2fdF5GV

Birmingham, AL | http://bit.ly/2fdF5GV

  • Amount of student debt forgiven under current plans = $126,265 to $162,984
  • Amount of student debt forgiven under Clinton plan = $67,298
  • Amount of student debt forgiven under Trump plan = $84, 066

Birmingham has one of the highest average amount of student loan debt per person in the U.S. Applying both the Clinton and Trump plans, the loan amount forgiven would be more than the original loan balance for some borrowers, but in either case would be significantly less than the amount forgiven under the current income-driven repayment plans. Clinton’s plan would give borrowers a 25% lower tax bill compared with Trump’s.

5. St. Louis, MO

  • Average Student Loan Balance = $53,120
  • Average Earning’s for Bachelor’s Degree Holders = $41,397

St. Louis, MO | http://bit.ly/2feneAd

St. Louis, MO | http://bit.ly/2feneAd

  • Amount of student debt forgiven under current plans = $79,129 to $92,779
  • Amount of student debt forgiven under Clinton plan = $43,592
  • Amount of student debt forgiven under Trump plan = $60,267

With a 128% student loan debt-to-income ratio, the savings the Clinton plan would bring would be a welcome relief to borrowers in St. Louis. Under Clinton’s plan, borrowers will see a tax bill at loan forgiveness that is 38% lower than what Trump’s plan would offer.

6. Atlanta, GA

  • Average Student Loan Balance = $66,403
  • Average Earning’s for Bachelor’s Degree Holders = $51,548

Atlanta, GA | http://bit.ly/2f1aAnl

Atlanta, GA | http://bit.ly/2f1aAnl

  • Amount of student debt forgiven under current plans = $105,532 to $126,068
  • Amount of student debt forgiven under Clinton plan = $59,985
  • Amount of student debt forgiven under Trump plan = $68,982

Millennials have been flocking to Atlanta in recent years. This influx of a generation heavily burdened with student loan debt could be why Atlanta ranks as one of the cities with the highest average student loan debt per person. Under Clinton’s plan, borrowers would get a 15% discount on the amount of taxable income created by loan forgiveness compared to Trump’s plan.

7. Hollywood, FL

  • Average Student Loan Balance = $55,646
  • Average Earning’s for Bachelor’s Degree Holders = $41,531

Hollywood, FL | http://bit.ly/2fvEzI2

Hollywood, FL | http://bit.ly/2fvEzI2

  • Amount of student debt forgiven under current plans = $97,868 to $120,026
  • Amount of student debt forgiven under Clinton plan = $57,893
  • Amount of student debt forgiven under Trump plan = $60,410

The smaller difference between the amount of student loan debt and income in Hollywood, FL means that the amount forgiven is much closer to the amount borrowed under both Clinton’s and Trump’s plans. Still, Clinton’s plan wins out. The taxable income at loan forgiveness is 5% lower under Clinton’s plan than Trump’s.

8. Cleveland, OH

  • Average Student Loan Balance = $56,922
  • Average Earning’s for Bachelor’s Degree Holders = $42,069

Cleveland, OH | http://bit.ly/2eUYe2c

Cleveland, OH | http://bit.ly/2eUYe2c

  • Amount of student debt forgiven under current plans = $90,384 to $107,946
  • Amount of student debt forgiven under Clinton plan = $59,406
  • Amount of student debt forgiven under Trump plan = $55,914

Cleveland is the one city on the list that would benefit more from Trump’s plan than from Clinton’s. While the city has one of the highest average student loan debt loads per person, borrowers will face a tax bill that is about 6% lower under Trump’s plan.

9. Buffalo, NY

  • Average Student Loan Balance = $50,534
  • Average Earning’s for Bachelor’s Degree Holders = $38,502

Buffalo, NY | http://bit.ly/2fvNJ7I

Buffalo, NY | http://bit.ly/2fvNJ7I

  • Amount of student debt forgiven under current plans = $82,581 to $97,875
  • Amount of student debt forgiven under Clinton plan = $54,746
  • Amount of student debt forgiven under Trump plan = $56,490

Borrowers in Buffalo, like those in Hollywood, FL, may ultimately end up with a forgiven balance that is higher than the original loan amount. The amount forgiven under Clinton’s plan would be 3% lower than the amount forgiven under Trump’s plan, resulting in a lower tax obligation.

10. Columbia, SC

  • Average Student Loan Balance = $57,339
  • Average Earning’s for Bachelor’s Degree Holders = $40,128

Columbia, SC | http://bit.ly/2fvQNAy

Columbia, SC | http://bit.ly/2fvQNAy

  • Amount of student debt forgiven under current plans = $99,939 to $137,476
  • Amount of student debt forgiven under Clinton plan = $67,084
  • Amount of student debt forgiven under Trump plan = $69,447

In Columbia, the low income level results in a higher amount of student debt forgiven compared to the original amount borrowed. Clinton’s plan yields a 3.5% savings over Trump’s plan.

No matter which candidate you support, we encourage you to vote.

Methodology

Debt was calculated under the current plan as 20-25 years of repayment, which is why there is a range. We calculated the average interest rate over the last 8 years across all federal loan types, which came to 6.5%, along with the most common income repayment term of 10% discretionary income.

For Clinton’s plan, the 10% discretionary income payment over 20 years was used for the current average interest rate across all federal loan types, which was 4.79%.

For Trump’s plan, the 12.5% discretionary income payment was calculated over 15 years, with the 6.5% interest rate.

All of these calculations assume no gain in income across the repayment term, which of course could vary greatly.

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