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How you could save under Trump's student loan repayment plan

If President-elect Donald Trump makes good on his campaign promises, some borrowers who took out federal student loans and use an income-based repayment plan may get a better deal.

Trump's proposal comes with trade-offs. Borrowers will have higher monthly payments under Trump's repayment plan, but would have their student loan debt forgiven sooner.

Here are the details Trump has proposed:

  • Borrowers contribute 12.5 percent of their income if they chose a repayment plan instead of 10 percent required under current repayment plans.
  • After 15 years in a repayment plan, borrowers could have their debt forgiven. Currently, borrowers in repayment plans have to wait 20 years or 25 years to have their loans canceled.

The percentage of federal student loan borrowers enrolled in income-based repayment plans has quadrupled over the past four years from 5 percent in 2012 to nearly 20 percent in 2016.

Income-based repayment plans are only available with federal student loans, not those offered by private lenders.

Though most borrowers in income-based repayment plans will pay off their debts, low-income workers likely will barely manage to cover the interest on their student loans as their balances grow.

Trump's proposed plan could potential help low-income borrowers more.

"These savings do come at a cost to the government and taxpayers, which must be weighed with enacting such a policy." -Andy Josuweit, CEO of Student Loan Hero

Take this example: A borrower with $70,000 of federal student loan debt, an average interest rate of 5.5 percent and an income of $50,000 (growing 3 percent annually) would pay about $89,600 over the course of 20 years under a Pay As You Earn plan, introduced by the Obama administration in 2012.

Under Trump's repayment plan, the same borrower would pay about $76,800 over the 15-year period before the balance is forgiven.

"Trump's proposal is obviously very beneficial to the borrower in this example case, who saves nearly $13,000 with this proposed plan," said Andy Josuweit, CEO of Student Loan Hero, a website that provides free tools to help borrowers manage their debts. "However, these savings do come at a cost to the government and taxpayers, which must be weighed with enacting such a policy."

Trump has not specified how the government would pay for the cost of forgiving federal student loans 5 years to 10 years earlier than current repayment plans. The Department of Education already spends about $11 billion on income-based repayment plans each year.

Trump can do this without Congress

Creating a new repayment plan for federal student loans doesn't require Congress to act. The Department of Education created two new repayment plans under the Obama administration.

"This could be implemented entirely through the regulatory process," said Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, which connects students with colleges and scholarships.

Student loan forgiveness doesn't let borrowers completely off the hook. Debt canceled by student loan repayment plans is taxed as income.