Congress proposes 0% interest rates for student loans

Several members of Congress have an alternative response to canceling the student loan – 0% interest rate 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 plans to enact large-scale student loan forgiveness of $10,000 or $50,000, there are two main proposals in Congress to make student loans interest-free:

  1. The law on loans; and
  2. Zero Percent Student Loan Refinancing Act

With Biden weeks away from 3 important deadlines for your student loans, could student loans be interest free?


Student loans: the law on loans

Senator Marco Rubio (R-FL) proposed the Exploiting Opportunities for Americans Now (LOAN) Act. Here’s how this bill would work:

  • Eliminate federal student loan interest on student loans;
  • Apply a one-time, non-compound origination fee that student borrowers will pay over the term 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 borrowers will automatically be placed into an income-based repayment plan (IBR), during which they will pay 10% of their adjusted gross income above 150% of the federal poverty level, except in the event of unforeseen financial hardship.

Although a one-time finance charge would replace interest on student loans, this bill is intended to reduce the overall financial burden on student borrowers.


Student Loans: Zero Percent Student Loan Refinancing Act

Senator Sheldon Whitehouse (D-RI) introduced the Zero Percent Student Loan Refinancing Act. Here’s how it would work:

  • Allow student borrowers to refinance their private and federal loans at a 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 borrowers with direct loans would automatically get their student debt refinanced.

Currently, the federal government does not refinance student loans. This bill would not only change the government’s role in student loans, but it would also eliminate student loan interest for eligible borrowers. Unlike the Loans Act, which would eliminate student loan interest when borrowing a student loan, this bill would refinance student loans after borrowing.


What it means for student loan forgiveness

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 large-scale student loan forgiveness will be independent of this proposed legislation in Congress. Why? If Biden enacts the student loan forgiveness, it will be a one-time forgiveness of a student borrower’s student loan principal balance (a determination separate from a student loan interest reduction). Second, while Democrats and Republicans have proposed legislation to address student loan interest, Congress is unlikely to pass either bill. Why? Neither political party will support the elimination of all interest on student loans. The financial loss to the federal government would affect both Democrats and Republicans. Third, Congress, not the President, sets student loan interest rates. The rise in interest rates on student loans began on July 1. Without congressional approval, Biden cannot unilaterally lower interest rates on student loans. That said, Biden announced major changes to student loan forgiveness. For example, as part of the rulemaking process with the U.S. Department of Education, Biden has offered to cut interest on student loans. Fourth, federal student loan payments will resume on September 1, 2022. Neither Congress nor Biden is expected to reduce student loan interest before that date. This means you should expect your regular interest rate before the Covid-19 pandemic to resume once student loan repayments resume. Evaluate all of your student loan repayment options to get a complete financial picture. Here are some great places to start saving money:


Student Loans: Related Reading

Student loans: red, white and blue

9 million borrowers are now eligible for student loan forgiveness

Senators propose major changes to student loan forgiveness

Department of Education cancels $6 billion in student loans

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