We Were Promised Yachts

The Trump Administration will be implementing several changes to student loan financing starting this summer. The changes encompass borrowing limits, restrictions on who can borrow, repayment processes, and forgiveness. The bill was passed as part of the “One Big Beautiful Bill Act.

One of the most significant changes affects Grad PLUS loans, which currently allow students to borrow the full cost of attendance with no lifetime limit. Graduate students only make up about 16% of college students but account for 46.6% of loan disbursements. The Trump administration states that allowing graduate students to borrow so much effectively removed any cap for students to borrow and led to tuition skyrocketing. It argues that ending this policy will reduce overborrowing and encourage colleges to lower costs^[1].

This line of thinking follows the Bennett Hypothesis, which argues that student loans increase the demand for a college education, which then increases tuition^[2]. It has mixed empirical support with stronger correlations observed in studies that compare a college’s sticker price and federal aid and much weaker or no relationship found in studies that compare what students actually pay.

Other efforts to reduce amounts borrowed include setting limits on what graduate students can borrow. The administration identified 11 specialties as “Professional” and limited their borrowing to $200,000. All other graduate degrees are limited to $100,000^[1]. Professional degrees are programs that require at least two years of post-baccalaureate education and require professional licensing to begin work, but the requirements have not been applied to career paths that also meet those metrics, like teaching and nursing^[3]. In response, the Trump administration stated that the “Professional” allocation was an internal classifier and not an indicator of if a specific job type was professional in nature^[4]. They also noted that, for nursing in particular, 90% of borrowers do not reach the $100,000 cap and will not be impacted by the new rules.

Although there are lifetime limits set, the new rules set undergraduate and graduate debt on separate buckets. Before, these totals were combined, but now the cap for graduate degrees does not include amounts borrowed during undergraduate study, which is subject to a separate cap. This could allow students to borrow more than they could before the changes.

Repayment options for loans have also been changed substantially by ending Biden-era income-driven repayment plans. The Repayment Assistance Plan (RAP) and new Standard Tiered Repayment Plan will become available later this year. Unlike plans under the Biden-era, all plans require some form of payment with the lowest option set at $10 a month or 1% of the borrower's income. These plans scale up to 10% of the borrower's income which is set by income level. RAP also requires that the first $50 of any payment be applied to principal of the loan and that any unpaid interest be forgiven, so amounts owed don’t balloon due to unpaid interest. This also stretches forgiveness from 20 years out to 30 years^[5].

The Standard Tiered Plan sets repayment time according to the borrower’s principle loan amount with those with less than $25,000 given 10 years, those with $50,000 given 15 years, and so on until students with more than $100,000 to repay are given 25 years. These plans set a standard payment, dependent on the loan amount and timeframe for repayment^[6].

Loan deferment rules have also changed by eliminating options to defer loans for economic hardship or unemployment reasons. In those circumstances, borrowers will be able to quickly switch to a RAP plan. Other deferment options remain, but general forbearance is limited to nine months within any 24-month period^[6].

Institutions also have new requirements placed on them to qualify for federal loans. Colleges whose four-year graduates do not earn more than high school students, or graduate students that do not earn more than people with bachelor's degrees will lose access to federal student loan lending. This is called the “do no harm” rule to hold institutions accountable for their programs and graduates. Any institution whose students fail to meet these benchmarks in two out of three consecutive years will lose access to federal loans for two years.^[7]

My Take

I was in high school during the peak “college will solve all your problems” era and I remember sitting in one of the many presentations by yet another person trying to convince us to go. This particular one had a chart that showed how many years people would have to work at each education level before they could buy a yacht. There was no nuance in this chart. No degree was specified, the imaginary job was unknown, I don’t even think they said how much the yacht was. 

But the message however was clear. The more education you had, the faster you could buy a yacht.

Ten years later, my peers and I learned about that missing context. Our college debt (among other things) has apparently led to millennials culturally killing expensive golf club memberships, pricey engagement rings, casual dining and department stores. I didn’t come out of college with near the debt of some of my cohorts. I certainly felt the pinch.

So it may surprise some readers when I say this:

As much as I dislike Trump, I don’t hate these changes.

The underlying cause of college tuition being increased by student loan access, is probably only slightly correlated. There are years where federal loan amounts were stagnant, but college tuition increased. There are years where college tuition is maintained when the amount available for students to borrow increased. This isn’t to say one has no impact on the other, but it's not “one to one” like the Trump admin claims.

College tuition has actually been stagnant or in many cases has decreased in inflation-adjusted terms in the last several years while borrowing still has increased. That’s because in many cases, students also borrow to cover their living expenses, which has dramatically increased.

I know this cuts against the current narrative, but college is expensive because that degree is usually worth the investment. Some get a better deal, some settle for a lower standard, some just get a free ride, but on the net, a college education usually comes with more success and more returns. That doesn’t just come from the program you studied. Getting through college requires all sorts of soft skills that employers look for: delayed gratification, the ability to work on something boring, problem solving, communicating complicated ideas, time management, adaptability, etc. 

This is not to say people without college degrees don’t have these traits. Hell, plenty of college graduates somehow get all the way through and completely miss these lessons. 

This is to say people who graduate college are likely to have these traits more developed. But rightly or wrongly, a college diploma remains one of society’s most widely accepted signals that a person has developed them. 

For all the doomsday scenarios only about half the college graduates leave with any debt, and of those, the average debt is only about $40,000. Things get pretty crazy when you focus on loans taken for graduate school, which is probably why this plan focuses on capping those loans. If anything, there should probably be more caps so students can only borrow an amount with some proximity to the average salary for that job. 

Probably the best thing about these changes is the interest forgiveness. Runaway interest is one of the most commonly cited issues that hobbles borrowers. People sign up for the income based plans only to find that their monthly payment didn’t cover the interest and their loans ballooned even after years of payment. RAP plans stop that.

There are plenty of qualms to be had over the professional classifier for graduate degrees, but getting mad over not being considered a professional degree is not one. There are limitations and the standard needs to be applied across the board. The nurse anesthetists need more than $100,000 for their degree, but the social worker will be just fine.

At the end of the day, the student loan system should do two things: make college accessible and protect students from financial ruin. For all of the political baggage surrounding this law, many of these changes move in that direction. Capping borrowing for programs with questionable returns, forcing colleges to demonstrate that their graduates actually earn more than they would have otherwise, and ending the absurd practice of charging interest that grows faster than a borrower can pay it are all sensible reforms. The real test will be whether these rules are applied consistently and whether policymakers remain willing to adjust them when they create unintended consequences. College should still be a pathway to opportunity, not a 30-year financial hangover—and if these changes help move the system closer to that goal, they deserve more credit than many of Trump’s policies usually earn.