Are 0% Interest Student Loans Better Than Forgiving $10,000?

(NerdWallet) – Cancellation is the most popular proposal for settling student debt, but it is not the only one. As the interest-free student loan payment suspension enters its third year, some are wondering if 0% interest on student loans is a better answer.

“I think this COVID pause has really illustrated — hopefully for policymakers but certainly for consumers — that interest is what’s really killing people,” says Betsy Mayotte, president and founder of the Counselors Institute. in student loans.

She has spoken to many borrowers who say they would not refuse forgiveness but would much prefer an interest rate reduction.

The Biden administration is expected to announce $10,000 cancellation Federal borrowers earning less than $150,000 for individuals and $300,000 for couples. This matches the president’s campaign promises, but falls short of what some experts say is necessary.

Lodriguez Murray, the United Negro College Fund’s senior vice president for public policy and government affairs, encourages “the administration to get bigger and bolder.”

“When there’s a way to reset the course of history for certain populations, you should do it,” Murray says.

Tomas Campos, CEO and co-founder of debt optimization software Spinwheel, thinks 0% interest on student loans might be a realistic solution. Student loan debt “impacts half of American households. They may not be in debt themselves, but they see their loved ones struggling,” Campos says.

According to a recent NPR poll, the majority of the general public supports partial student loan relief, but that support declines with higher forgiveness amounts.

Here’s how eliminating student loan interest could work based on two existing proposals for borrowers with problematic long-term debt.

Two packages at 0% interest

Loans Act

Last summer, U.S. Senator Marco Rubio, R-Florida, reintroduced the Leverage Opportunities for Americans Now Act. This law, first introduced in May 2019, directs the government to disburse all federal student loans at 0% interest and replaces interest charges with a one-time origination fee.

Under the Loans Act, undergraduate student loans would incur a 20% origination fee and PLUS loans would incur 35%. This fee would be added to the total principal amount and repaid over the life of the loan.

Borrowers would automatically be placed into an income-driven repayment plan, but would have the option of choosing the standard 10-year repayment plan. Those who repay their loan early would be reimbursed a portion of the origination fee.

If a student borrows $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 $34,349 repaid in total. With a 20% origination fee and no interest, this borrower would have monthly payments of $270 with a total repayment of $32,400.

Low-income borrowers who enter an income-driven repayment plan would benefit the most. According to a NerdWallet Analysisa borrower with $27,000 in debt and a starting annual salary of $30,000 would pay nearly $42,000 by the time the waiver of the income-contingent repayment takes effect. With the Rubio proposal, this borrower could pay about $9,600 less.

Zero Percent Student Loan Refinancing Act

Rep. Joe Courtney, D-Connecticut, introduced the Zero Percent Student Loan Refinance Act in 2021. Sen. Sheldon Whitehouse, D-Rhode Island, introduced a version of the bill in the Senate earlier this year .

The Zero Percent Student Loan Refinancing Act would automatically refinance all loans under the federal direct loan program at 0% interest. It would also give borrowers with federal home education loans, Perkins loans and Public Health Services Act loans the option to refinance at 0% interest.

Borrowers with private student loan debt would also be eligible for 0% refinancing, according to email statements from Meaghan McCabe, senior communications adviser at Whitehouse’s office.

This proposal was introduced to help student borrowers recover from pandemic-induced financial hardship and rising interest totals that could exceed the original principal loan balance. The proposal would allow borrowers to refinance at 0% until 2024.

Borrowers would be eligible for refinance anytime during the open program window, even if they are still in school, according to McCabe. According to this proposal, a student who refinances immediately and has $27,000 in debt at an interest rate of 4.99% would save approximately $7,349 over a 10-year term.

What can you do now?

The existing proposals are far from being put to a vote in either house of Congress, and there is not even a consensus on whether 0% is the ultimate answer to the crisis. student debt.

Interest-free student loans “can be coupled with other actions, really, but it’s not enough to make a real difference,” Murray says.

Mayotte says a lower interest rate, perhaps 1%, on student loans may be a better solution, as borrowers may not take 0% debt seriously. She also thinks student loans at lower interest rates have a better chance of winning bipartisan support in a divided Congress.

Meanwhile, federal student loans should return to reimbursement in Septemberand this means that the interest charges will also resume.

Borrowers should plan for repayment. If you think you’ll have trouble, contact your repairer to discuss your options, such as reducing payments or stopping payments altogether through forbearance. No matter how you proceed, however, interest charges will continue to accrue.

As for zero-rate or reduced-rate student loans, Mayotte urges borrowers to make their voices heard. She says, “I think if more consumers start writing to their members of Congress asking for it, we might get more attention and more legs.”