Both before and after the inauguration of President Biden, forgiveness-focused student loan legislation has received a lot of attention. In particular, many politicians and groups have supported a resolution spearheaded by Senators Warren and Schumer that calls for up to $50,000 of student loan forgiveness.
But in the past few years, some lawmakers have tried to address America’s student loan crisis from a different angle. Rather than debt cancellation, several recent student loan bills have focused on student loan interest.
Unlike student loan forgiveness bills which seek to eliminate student debt altogether, student loan interest legislation aims to make them more affordable. Below, are seven different ways that recent student loan interest policy proposals have called for change.
1. Cancel student loan interest
This is certainly the most extreme of the student loan interest legislation that policymakers have introduced. But some bills have, in fact, called for completely eliminating interest on federal student loans.
For example, Sen. Marco Rubio (R-FL) introduced the Leveraging Opportunities for Americans Now (LOAN) Act which intends to replace interest rates on student loans with a one-time, non-compounding financing fee. If passed, the bill would also place all borrowers on a modified Income-Based Repayment plan.
In July 2019, Rep. Eric Swalwell (D-CA) introduced H.R.3751 — No Student Loan Interest Act. This student loan bill called for the Education Department to reduce the interest rate on all of its loans to 0% and even repay the interest that borrowers had already paid.
By removing interest from the equation, student loan borrowers would no longer have to worry about their loan balances growing while they’re still in school. Also, income-driven repayment (IDR) would become more attractive as unpaid interest accrual and capitalization would no longer be a concern.
2. Allow federal student loan refinancing
Under the current Higher Education Act student loan legislation, there’s no way to refinance federal student loans with the Department of Education. So if you want to access a lower interest rate, the only way is to refinance with a private lender.
But once federal borrowers refinance their loans, they’re no longer eligible for federal benefits like the ability to join IDR plans or pursue federal forgiveness programs. They also no longer qualify for federal forbearance or deferment.
This puts borrowers at a disadvantage who took out their loans in years when federal student loan interest rates were higher than today. Borrowers can’t get the current rates from the federal government. And if borrowers get them from a private lender they’ll lose access to valuable federal protections.
But some student loan interest policy proposals call for refinancing opportunities for their federal loans through the Department of Education. The If It’s Good Enough For the Banks, It’s Good Enough For Students Act (S.1845) would allow federal loans to be refinanced at the same rate the banks receive from the Federal Reserve.
More recently introduced, H.R.7449 – Bank on Students Coronavirus Emergency Loan Refinancing Act of 2020 would cause all federal loans to be refinanced automatically at the rate for the 2020-2021 academic year. Surprisingly, this bill calls for private loan borrowers to have the option to refinance their loans with the federal government, too.
3. Increase the student loan interest deduction
Under current IRS rules, eligible student loan borrowers can deduct up to $2,500 of student loan interest from their taxable income. But depending on your loan amount, interest rate, and repayment plan, the amount of interest that you pay on your student loans each year could be far higher.
Some lawmakers have introduced student loan legislation that would raise the student loan interest deduction limit. H.R. 3098 and H.R. 1070 are two prominent examples.
H.R.3098 — Student Loan Interest Deduction Act of 2019 calls for the maximum student loan interest deduction to be increased to $5,000 for individuals and $10,000 for couples who are married filing jointly. H.R.1070 — Student Loan Interest Tax Deduction Expansion Act is even more generous, raising the limit to $7,500 ($15,000 for joint returns).
4. Eliminate student loan interest capitalization
When unpaid student loan interest capitalizes, it’s added to the loan’s principal. Capitalization can happen at the end of a forbearance or deferment period. It can also occur after borrowers leave a IDR plan if unpaid interest had accrued during their time on the plan.
For example, let’s say that you have $100,000 in student loans and spend five years making payments on the REPAYE plan. Due to low payments that didn’t cover all of your interest charges, your account accrues $25,000 in unpaid interest.
Next, imagine that you forget to recertify your income and you’re kicked off of the REPAYE plan. At that moment, the $25,000 in unpaid interest would capitalize and your future interest charges would be based on a $125,000 principal balance. And, from that point forward, you’d be paying interest on your interest.
It’s easy to see how interest capitalization can cause student loan borrowers to dig themselves into deeper and deeper holes. That’s why H.R.4590 – End Capitalization for Struggling Borrowers Act wants to eliminate capitalization after forbearance and certain deferment periods.
The Affordable Loans for Any Student Act (H.R.2065) takes things a step further by prohibiting interest capitalization in all instances. This student loan bill would also reduce the number of federal IDR plans from four to two.
5. Waive interest during certain deferment and grace periods
For unsubsidized student loan borrowers, interest will accrue on your loans while you’re in school and during your grace period. This means that if you borrow $40,000 to pay for your higher education, interest accrual could raise your balance to $45,000 or more before your repayment plan even begins.
Rep. Kendra Horn (D-OK) has introduced a piece of student loan interest legislation that aims to change this. If passed, H.R.3792 – Guaranteeing Respite After College Ends (GRACE) Act would end the collection of interest during deferment and it would not begin until after the borrower’s grace period had elapsed.
6. Cap the student loan interest rate
Prior to passing the Student Loan Reform Act of 1993 and launching the Direct Loan program, Congress began the unprecedented practice of including variable rates on its federal student loans. These variable-rate loans were based on short-term Treasury securities and lasted until 2006.
Since 2006, federal student loans have come with fixed interest rates. New rates are set each year on July 1st and are based on the high yield of the 10-year Treasury Notes at that time.
Basing rates on the 10-Year Treasury Note has been a great thing for current students as rates are at an all-time low. But if the high yield of the 10-Year Treasury Note were to significantly increase in the future, that would also cause student loan interest rates to rise.
To protect against this, some legislators have called for an interest rate cap to be imposed. The Student Loan Fairness Act (H.R.3257), if passed would ensure that Direct Loan rates never exceed 3.4%. The proposal is also a strong student loan forgiveness bill as it would reduce the required payments for receiving PSLF forgiveness from 120 to 60.
H.R.3793 – Student Loan Accrual Support and Help Act would set a maximum federal student loan interest rate of 5%. But, under this bill, rates would still be equal to the high yield of the 10-Year Treasury Note in years that it happened to be lower than the 5% cap.
7. Reduce interest rates on university-cosigned student loans
As tuition rates have steadily risen over time, some lawmakers and student loan experts feel that requiring universities to have more “skin in the game” could be a smart way to improve the higher education system.
In 2019, Rep. Scott Perry (R-PA) introduced the Student Loan Reform Act (H.R.3786) which he hoped would encourage universities to cosign student loans. To accomplish this, the government would allow students to access lower-than-standard interest rates by choosing university-cosigned loans.
This law would also obligate the cosigning universities to pay the outstanding balance on any defaulted student loans. The idea behind the bill was that by putting universities “on the hook” for student loan repayment, they’d be more incentivized to provide the best academic programs and to offer career support services for both their graduates and dropouts.
Lawmakers have been working hard behind the scenes to offer student loan interest relief to borrowers. It’s encouraging to see that so many of our elected officials have trained their attention on these (and other) student loan issues.
Although each of the student loan interest policy proposals listed above have yet to pass both houses of Congress, current legislation does provide many benefits for federal borrowers. To learn more about your options, check out our student loan forgiveness and coronavirus stimulus guides.