Are 0% Interest Student Loans Superior to a $10,000 Cancellation?
The most common option to address student loan debt is a cancellation, but it is not the only one. As the interest-free student loan payment suspension enters its third year, some question whether 0% interest on student loans might be a better solution.
Betsy Mayotte, president, and creator of The Institute of Student Loan Advisors believes that the COVID pause has demonstrated — ideally for policymakers but certainly for consumers — that the interest is what’s truly killing people.
She has spoken with other borrowers who claim they wouldn’t refuse forgiveness but would prefer an interest rate reduction.
The Biden administration is anticipated to announce that federal student loan borrowers earning less than $150,000 for individuals and $300,000 for couples will receive a $10,000 cancellation. This is consistent with the president’s campaign promises, but it falls short of what some experts believe is required.
Rodriguez Murray, senior vice president for public policy and government affairs at United Negro College Fund, urges the administration to “go larger and bolder.”
Murray states, “When there is a means to change the trajectory of history for some populations, you should.”
Tomas Campos, CEO, and co-founder of the debt optimization program Spinwheel believes that 0% interest on student loans could be a feasible option. Student loan debt affects fifty percent of American households. They may not be in debt themselves, but they observe their loved ones struggle with it, according to Campos.
According to a recent NPR poll, the majority of the public favors a partial cancellation of student loans, but this support falls as the number of cancellations increases.
Based on two current plans aimed at borrowers with serious long-term debt, here is how removing student loan interest may operate.
Two zero percent interest plans
Sen. Marco Rubio, R-Florida, reintroduced the Leveraging Opportunities for Americans Now Act in the summer of 2016. This measure, which was introduced in May 2019, requires the government to disburse all federal student loans at 0% interest and replaces interest rates with a one-time origination fee.
Under the LOAN Act, the origination cost for undergraduate student loans would be 20 percent and the origination fee for PLUS loans would be 35 percent. These costs would be applied to the loan’s main balance and repaid over its term.
Borrowers would be automatically enrolled in a plan based on their income, but they would have the option to select the conventional 10-year plan. A portion of the origination price would be reimbursed to those who repay their loan early.
If a student borrows $27,000 in federal loans at the 4.99 percent interest rate for 2022-23, their monthly payment would be around $286 for ten years, totaling $34,349. With a 20% origination charge and no interest, this borrower would have $32,400 in total payments amounting to $270 per month.
The most advantage would go to low-income borrowers who enroll in an income-driven repayment plan. A borrower with $27,000 in debt and a starting yearly wage of $30,000 would pay over $42,000 by the time income-driven repayment forgiveness kicked in, according to an estimate by NerdWallet. With Rubio’s idea, the borrower may pay approximately $9,600 less.
Act to Refinance Student Loans at Zero Percent
In February of this year, Rhode Island Democrat Sheldon Whitehouse introduced the Zero-Percent Student Loan Refinancing Act. Rep. Joe Courtney (D-Connecticut) also introduced a bill version in the House.
The Zero-Percent Student Loan Refinancing Act would refinance all federal Direct Loans to 0% interest automatically. In addition, it would allow borrowers with Federal Family Education Loans, Perkins loans, and Public Health Service Act loans to refinance to 0% interest.
According to email statements from Meaghan McCabe, a senior communications assistant in Whitehouse’s office, borrowers with private student loan debt would also be eligible for the 0 percent refinance.
This plan was proposed to assist student loan borrowers in recovering from the financial strain caused by the pandemic and accumulating interest totals that have the potential to surpass the original principal loan balance. The concept would provide refinancing at zero percent through 2024.
According to McCabe, borrowers might remortgage at any moment throughout the program’s open window, even if they are still in school. Under this idea, a student who immediately refinanced $27,000 in debt at 4.99% would save around $7,349 over 10 years.
What options do you have?
Existing plans are a long way from a vote in either chamber of Congress, and there is no agreement on whether 0% is the ultimate solution to the student loan dilemma.