Here’s what you need to know.
Student loans with no interest just got proposed in Congress — by a Republican.
Sen. Marco Rubio (R-FL) reintroduced legislation — the Leveraging Opportunities for Americans Now (LOAN) Act — that would eliminate interest rates on federal student loans. Yes, you read that right. “No interest on student loans” and “Republican.” It seems that mostly Democrats have been proposing to change student loans, but Rubio thinks this could change the future of student loan repayment. The LOAN Act, which Rubio first introduced in 2019, would help student loan borrowers who are burdened with student loan debt pay off their student loans faster. Rubio first introduced the LOAN Act in May 2019. Student loans have become a hot topic on Capitol Hill this week, with debates on student loan cancellation.
Student loans with no interest
Here’s how the LOAN Act would work:
Would apply to federal student loans;
Eliminate interest on federal student loans;
Instead would use a one-time, non-compounding origination fee that student loan borrowers will pay over the life of their student loan
This origination fee, also referred to as a “financing fee”, will start on July 1, 2022;
The origination fee will not increase over time; and
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.
Student loans: the fees
The proposed legislation would eliminate your interest rate, but there would be a one-time fee equal to:
Undergraduate student loans: 20% of the principal amount of student loans
Student loans: Will Biden support no interest on student loans?
As a presidential candidate, President Joe Biden didn’t support student loans with no interest. Instead, Biden has focused on $10,000 of student loan cancellation. Biden also has focused on simplying student loan repayment by revising income-driven repayment plans to be based on 5% of discretionary income. He also wants to have more student loan borrowers get student loan forgiveness through the Public Service Loan Forgiveness program, and he would make two-year and four-year public colleges and universities tuition-free. As president, Biden has cancelled $3 billion of student loans and extended student loan relief for millions of student loan borrowers twice. The topic of eliminating interest on federal student loans has been raised by some progressives, but the idea has never gained traction during the 2020 presidential campaign, in Congress or during the Biden presidency. Similarly, when Rubio originally introduced the LOAN Act, the proposed legislation had no co-sponsors — either from Republicans or Democrats. Now, with Rubio’s reintroduction of the student loan bill, it remains to be seen whether there is any support among Democrats or Republicansfor removing interest rates from federal student loans.
Student loans: final analysis
While there would be no interest rate, there would be a sizeable, one-time financing fee. While this fee could be reduced based on a student loan borrower’s income, it could still constitute a relatively large portion of the principal balance of the federal student loan. That said, the positive for student loan borrowers is that, under this proposal, there is no compounding interest, which means that interest is charged on both principal and interest. Compounding interest can become very expensive for student loan borrowers, even with a relatively small beginning student loan balance.
Including Biden’s extension of student loan relief, federal student loan borrowers will get $110 billion of student loan cancellation. Since March 2020, student loan borrowers have enjoyed no interest accrual and temporary student loan forbearance, which has resulted in $5 billion of savings each month. Going forward, Rubio is focused on helping working families pay off student loans without the significant burden of expensive student loan debt. How? The origination fee, which won’t increase over time, helps student loan borrowers have more certainty over their student loan payments because they have more transparency over their future student loan balance. Plus, student loan borrowers who are in currently enrolled in a college or university can continue with the current system of federal student loans, or they can choose federal student loans with no interest rate. Under this proposal, student loan borrowers can pay off their student loans, including the origination fee, early without penalty. Any federal student loan borrowers who is earning less than 150% of the federal poverty line would not have to pay each month for their student loan. There are many reforms that the Biden administration and Congress could make to your student loans regarding student loan repayment, student loan forgiveness and student loan cancellation. However, removing student loan interest doesn’t appear to be at the top of that agenda.
If you have student loans, your interest isn’t going away anytime soon. Beginning February 1, 2022, your regular interest rate will start applying again to your federal student loans. Make sure you’re prepared for student loan repayment. Here are some smart options:
Student loan refinancing (get a lower interest rate + lower monthly payment)
Income-driven repayment plans (get a lower monthly payment)
Public service loan forgiveness (get student loan forgiveness)
Photograph by Alex Wong / Getty