Loan interest

Proposal to waive interest on student loans, instead of student debt, sparks debate

This story has been updated.

Progressive activists and lawmakers join a chorus of consumer protection organizations and groups, calling on Joe Biden to enact widespread student loan forgiveness when he takes office in January.

“Student loan debt is preventing an entire generation from buying homes, starting small businesses and saving for retirement — all things we rely on to grow our economy,” the Massachusetts senator said. Elizabeth Warren earlier this week. Warren is a leading voice in efforts to cancel student debt.

And if Biden fails to pass student loan forgiveness legislation through Congress, activists and advocates are calling on him to pursue executive action instead. “Executive action to cancel student debt would be a huge economic stimulus during and after this crisis,” Warren said.

Yesterday, a diverse coalition of more than 235 organizations wrote to Biden, urging him to act on “day one” of his administration to cancel student debt and to resort to executive action if needed. The organizations wrote that the massive cancellation of student loans would be a critical economic stimulus for millions of Americans grappling with a historic pandemic, while tackling systemic racial disparities in higher education that have only ‘to get worse.

But some have pushed back against the growing momentum of student debt cancellation, arguing that the massive cancellation of student loans Do not provide as much of an economic stimulus as supporters claim. There are also concerns that enacting student debt forgiveness through executive action could lead to legal challenges; defenders counter that the legal basis for using executive power to write off student loan debt it’s sound.

An alternative idea to mass student loan forgiveness is instead to eliminate interest on student loans. Matt Reed recently proposed in Inside Higher Education that “removing student loan interest” would allow “every dollar repaid” to be credited toward principal.

Interest has long been a major concern for student borrowers, especially since the federal government has been gradually reducing federal student loan subsidies that can stop or slow the accumulation of interest. A borrower who takes out $20,000 in unsubsidized federal student loans at a 6% interest rate could owe nearly $25,000 by the time he graduates from a four-year degree program. Paying off this balance over a standard repayment term of 10 years would cost the borrower over $33,000.

The problem of interest accrual can be even deeper for borrowers in income-oriented repayment plans, which are programs that allow borrowers to repay their loans based on their income. Some opponents of immediate student loan cancellation point to income-tested repayment plans as viable options that already exist as alternatives to mass debt cancellation, as these programs already result in loan cancellation at the end their repayment terms (which are usually 20 or 25 years). ). But under federal law, interest still accrues for borrowers in repayment under these plans, and that can have far-reaching consequences.

A borrower with $50,000 in federal student loans with an annual income of $40,000 per year and a family of 2 would have monthly payments under the Pay As You Earn (PAYE) plan of approximately $130 per month. But at an interest rate of 6%, interest would accrue on the loan balance at the rate of $250 per month. So even if the borrower makes payments and stays in good standing on the loans, the overall balance increase at the rate of $120 per month. Over time, this increases the borrower’s total loan obligation by thousands of dollars. After 10 years of payments, the total loan balance would be over $64,000, despite the borrower having made over $15,000 in payments on the original loan balance of $50,000. After another 10 years of payments, the borrower may qualify for loan forgiveness, but may be taxed on an even higher overall balance. Meanwhile, the possibility of full repayment of their outstanding loan obligation would become increasingly remote over time.

Reed argues that eliminating all federal interest on student loans could be a viable solution to this problem and could have the added effect of reducing the sprawling student loan bureaucracy. “Zero interest would be easy to administer,” Reed wrote.

Reed also argues that eliminating student loan interest might also have more political appeal than simply writing off student loan debt altogether. People would still be “responsible for their decisions,” he wrote. “But recognizing that things have gotten out of control over the past two decades – public divestment in public higher education, in particular – we could stop trying to cash in on debt. Pay back all you have borrowed, but only what you have borrowed… There is a simplicity and fairness to this proposal that could make it politically feasible and sustainable.

Indeed, there is evidence that such a proposal could have bipartisan appeal. Republican Senator Marco Rubio proposed last year to eliminate interest on federal student loans; he proposed replacing interest with a one-time, lump-sum origination fee to be paid over the term of the loan.

However, Rubio had proposed this as a change for newly issued federal student loans, not for loans that had already been disbursed to borrowers. It’s unclear whether he and other Republican senators would support such a move now for federal student loans that are already in repayment.

Moreover, eliminating interest on student loans would not necessarily provide an economic stimulus to borrowers, even if it reduced monthly payments or the cost of repayment for some, and would not necessarily resolve the deep racial disparities in education. higher education that concern advocates for student borrowers.

“Interest is not the main thing that hurts low-income borrowers and borrowers in default,” said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “It is the existence of the debt that is the real problem. A lot of our clients can’t pay $5,000 or $50,000. Our clients need the total debt extinguished, and even a $20,000 write-off would eliminate debt for approximately 79% of defaulting borrowers.

Still, if eliminating interest gains bipartisan support, Biden could see it as an attractive alternative — or even a complement — to enacting sweeping student loan forgiveness. It could then focus executive action on fixing, improving, and possibly expanding existing student loan forgiveness programs such as borrower defense until repayment (which allows borrowers defrauded by their schools to eliminate their federal student loans) and the civil service loan forgiveness, two programs he expressed strong support for.

Biden has not indicated at this time whether he would support eliminating student loan interest. However, if such a proposal did not gain sufficient bipartisan traction, Biden would face the same decision he faces today regarding student loan debt forgiveness: to proceed with sweeping executive action, or simply reduce the contours of the problem.

Further reading

Could Biden cancel student debt through executive action?

Biden reaffirms support for canceling student loans, but won’t commit to executive action yet — here’s why

Could Mass Student Loan Cancellation Mean a Tax Nightmare for Borrowers?

What the election results mean for student borrowers

Biden’s win means DeVos out by January