Several members of Congress have an alternative answer to student loan cancellation — 0% interest rates for your student loans.
Here’s what you need to know — and what it means for your student loans.
Student Loans
As President Joe Biden considers whether to enact wide-scale student loan cancellation of $10,000 or $50,000, there are two main proposals in Congress to make student loans interest-free:
- The LOAN Act; and
- Zero-Percent Student Loan Refinancing Act
Student loans: the LOAN Act
Sen. Marco Rubio (R-FL) proposed the Leveraging Opportunities for Americans Now (LOAN) Act. Here’s how this proposed legislation would work:
- Eliminate student loan interest on federal student loans;
- Apply a one-time, non-compounding origination fee that student loan borrowers will pay over the life of their student loan;
- The origination fee will be 20% of the principal student loan balance for undergraduate student loans and 35% of the principal student loan balance for PLUS student loans;
- Student loan borrowers automatically will be placed in an income-based repayment (IBR) plan, during which they pay 10% of their adjusted gross income in excess of 150% of the federal poverty line, except in times of unforeseen financial hardship.
While a one-time financing fee would replace student loan interest, this proposed legislation aims to reduce the overall financial burden on student loan borrowers.
Student loans: Zero-Percent Student Loan Refinancing Act
Sen. Sheldon Whitehouse (D-RI) introduced the Zero-Percent Student Loan Refinancing Act. Here’s how it would work:
- Enable student loan borrowers to refinance their private and federal loans to 0% student loan interest rate;
- This would include student loan refinancing for all eligible federal Direct student loans, FFEL student loans and Perkins student loans;
- Student loan borrowers with Direct Loans would get their student loan debt refinanced automatically.
Currently, the federal government doesn’t refinance student loans. This legislation would not only change the government’s role in student loans, but it would also eliminate student loan interest for eligible student loan borrowers. In contrast to the LOAN Act, which would eliminate student loan interest when borrowing a student loan, this proposed legislation would refinance student loans after borrowing.
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What this means for student loan cancellation
There are several key takeaways related to Biden’s potential decision to cancel student loans and the future of student loans more broadly. First, Biden’s decision to enact wide-scale student loan cancellation will be independent of this proposed legislation in Congress. Why? If Biden enacts student loan forgiveness, it will be a one-time cancellation of a student loan borrower’s principal student loan balance (a separate determination from a reduction in student loan interest). Second, while Democrats and Republicans have proposed legislation to address student loan interest, Congress is unlikely to pass either of these bills. Why? Neither political party will support the elimination of all student loan interest. The financial loss to the federal government would concern both Democrats and Republicans. Third, Congress, not the president, sets student loan interest rates. Higher student loan interest rates began on July 1. Without congressional approval, Biden can’t unilaterally lower student loan interest rates. That said, Biden announced major changes to student loan forgiveness. For example, through the rulemaking process with the U.S. Department of Education, Biden proposed lowering student loan interest. Fourth, federal student loan payments will restart on September 1, 2022. Neither Congress nor Biden is likely to lower student loan interest before then. That means you should expect your regular interest rate before the Covid-19 pandemic to resume once student loan payments restart. Evaluate all your options for student loan repayment so you have a complete financial picture. Here are some great places to start saving money:
- Student loan refinancing (lower interest rate + lower payment)
- Income-driven repayment (lower payment)
- Student loan forgiveness (federal student loans)