(NerdWallet) – Cancellation is the most popular proposal for dealing with student loan debt, but it’s not the only one. With the third year on hold for interest-free student loans, some are wondering if 0% interest on student loans is the better answer.
“I think this COVID hiatus has really shown — hopefully for policymakers, but definitely for consumers — that interest rates are what’s really killing people,” said Betsy Mayotte, president and founder of the Institute of Student Loan Advisors.
She has spoken to many borrowers who say they would not refuse forgiveness but would much rather see the interest rate go down.
The Biden administration is expected to announce a $10,000 cancellation for federal student loan borrowers earning less than $150,000 for individuals and $300,000 for couples. This is in line with the president’s campaign promises, but falls short of what some experts say is necessary.
Lodriguez Murray, United Negro College Fund’s senior vice president of public policy and governmental affairs, encourages “the administration to get bigger and bolder.”
“If there’s a way to reset history for certain populations, you should do it,” says Murray.
Tomas Campos, CEO and co-founder of debt optimization software Spinwheel, believes 0% student loan interest is a realistic solution. Student loan debt “affects half of American households. They may not be in debt themselves, but they see their loved ones struggling with it,” says Campos.
According to a recent NPR poll, the majority of the public supports partial student loan relief, but that support diminishes with higher cancellation amounts.
Here’s how removing interest on student loans could work based on two existing proposals aimed at borrowers with troubled long-term debt.
Two plans for 0% interest
Last summer, US Senator Marco Rubio, R-Florida, reinstated the Leveraging Opportunities for Americans Now Act. This law, first introduced in May 2019, requires the government to pay out all federal student loans at 0% interest and replaces interest charges with a one-time processing fee.
Under the Loan Act, undergraduate student loans would be subject to a 20% processing fee and PLUS loans would be subject to a 35% fee. These fees would be added to the total principal amount and would be repaid over the life of the loan.
Borrowers would be automatically placed on an income-based repayment schedule, but would have the option to select the standard 10-year repayment schedule. Those who repay their loan early would be reimbursed a portion of the setup fee.
If a student took out $27,000 in federal loans at the 2022-23 interest rate of 4.99%, their payment would be about $286 per month for 10 years, with a total repayment of $34,349. With a 20% processing fee and no interest, this borrower would have monthly payments of $270 for a total repayment of $32,400.
Low-income borrowers who take out an income-based repayment plan would benefit the most. According to NerdWallet analysis, a borrower with $27,000 in debt and an annual starting salary of $30,000 would be paying nearly $42,000 if the earnings-contingent forgiveness occurred. The Rubio proposal allows that borrower to pay about $9,600 less.
Zero Percent Student Loan Refinance Act
Rep. Joe Courtney, D-Connecticut, introduced the Zero Percent Student Loan Refinance Act in 2021. Senator Sheldon Whitehouse, D-Rhode Island, submitted a version of the bill to the Senate earlier this year.
The Zero Percent Student Loan Refinance Act would automatically refinance all loans under the federal direct loan program at 0% interest. It would also allow borrowers with Federal Family Education Loans, Perkins loans, and Public Health Service Act loans to refinance to 0% interest.
Borrowers with private student loan debt would also be eligible for the 0% refinance, according to email testimony from Meaghan McCabe, a senior communications consultant at Whitehouse’s office
This proposal was introduced to help student loan borrowers recover from pandemic-related financial stress and rising interest rates that have the potential to exceed the original principal loan balance. The proposal would allow borrowers to refinance at 0% through 2024.
Borrowers could refinance at any time during the program’s open window, even if they’re still in school, according to McCabe. Under this proposal, a student who refinances immediately and owes $27,000 at 4.99% interest would save about $7,349 over 10 years.
what can you do now
The existing proposals are a long way from getting a vote in both houses of Congress, and there isn’t even a consensus on whether 0% is the ultimate answer to the student debt crisis.
Interest-free student loans “can really be coupled with other actions, but it’s not enough to make a real difference,” says Murray.
Mayotte says a reduced interest rate of perhaps 1% on student loans might be a better solution as borrowers may not take 0% debt seriously. She also believes student loans with reduced interest rates stand a better chance of winning bipartisan support in a divided Congress.
Meanwhile, government student loans are due to be repaid in September, and that means interest charges will also resume.
Borrowers should plan for repayment. If you think you’re going to have difficulties, contact your service provider to discuss your options, e.g. B. reduced payments or the complete cessation of payments through forbearance. However, no matter how you go about it, interest costs will continue to add up.
Regarding interest-free or reduced-interest student loans, Mayotte urges borrowers to make their voices heard. She says, “I think if more consumers start writing to their congressman to demand this, we could get a little more exposure and more legs for that.”