Now that President Biden's efforts to forgive student loan debt have been quashed by the Supreme Court, millions of borrowers will need to start making loan payments again. And after a multiyear pause, many are likely to struggle.
Part of the reason student loans can be so tough to pay off is that borrowers aren't just repaying the principal sums they took out -- they're also dealing with interest that accrues on their debt.
There are different repayment plans federal student loan borrowers can sign up for to make their monthly payments more manageable. But popular choices, like income-driven repayment plans and extended repayment plans, can result in extra interest that adds up over time.
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But one proposal is seeking to take student loan interest out of the equation. And it could end up being a lifeline for borrowers.
A world of financial relief
The Student Loan Interest Elimination Act aims to refinance the interest rate of all existing federal student loans to 0% and cap interest rates for new loans signed. Future borrowing rates would be based on need and range from 0% to 4%, at most.
Of course, those opposed to this idea are likely to argue that student loan interest is what helps cover the cost of operating the federal student loan program to begin with. But according to the new legislation, that issue is solvable.
Student loan borrowers' payments would go into a trust fund that would invest in different income-producing vehicles, like municipal bonds. The returns on those investments would be used to cover the cost of the federal student loan program so it can continue to operate.
Will student loan interest go away?
The aforementioned proposal is just that -- a proposal that a couple of lawmakers have put together in an attempt to ease the burden of repaying student loans. Whether it goes through is a different story.
But a proposal like this could make student loan debt much easier for borrowers to manage. And it could also incentivize borrowers to try to limit their debt to federal student loans, which offer more protections than private loans.
Sometimes, private lenders offer up competitive rates to borrowers in an effort to lure them in. But private lenders, for example, may not offer the option to hit pause on student loan payments via forbearance or deferment, whereas those options are commonly on the table for federal student loan borrowers who qualify.
Plus, students who take out federal loans have different repayment plans they can apply for if the standard repayment plan doesn't work financially. Private lenders don't have to offer a variety of payment plan options.
All told, eliminating interest on federal student loans could do a world of good for borrowers who are stressed over the idea of having to resume their payments. And it could spare future borrowers a world of financial heartache, too. But it's hard to say whether this proposal will actually take off or ultimately get shut down like President Biden's student loan forgiveness plan.
