This story has been updated.
Progressive activists and lawmakers join a chorus of consumer organizations and groups, calling on Joe Biden to enact widespread student loan forgiveness as soon as he takes office in January.
“Student loan debt is preventing an entire generation from buying homes, starting small businesses and saving for retirement – all the things we rely on to grow our economy, ”said the Massachusetts senator Elizabeth warren earlier this week. Warren is a leading voice in the campaign to cancel student debt.
And if Biden fails to pass a student loan cancellation law through Congress, activists and advocates are instead calling on him to continue executive action. “Executive action to cancel student debt would be a huge economic stimulus during and after this crisis,” Warren said.
Yesterday, a diverse coalition of more than 235 organizations wrote to Biden, urging him to act on “day one” of his administration to cancel student debt and to take executive action if necessary. The organizations wrote that the massive student loan cancellations would be a vital economic stimulus for millions of Americans struggling with a historic pandemic, while also tackling systemic racial disparities in higher education which only got worse.
But some objected to the growing momentum for student debt cancellation, arguing that the massive student loan cancellation Do not provide as much economic stimulus as supporters claim. Some also fear that the cancellation of student debt through executive action could lead to legal challenges; advocates counter that the legal basis for using executive authority to cancel student loan debt is healthy.
An alternative idea to the massive cancellation of student loans is instead to eliminate the interest on student loans. Matt Reed recently proposed in Inside higher education that “removing student loan interest” would credit “every dollar paid back” on the principal.
Interest has long been a major concern of student borrowers, especially as the federal government has gradually reduced federal student loan grants that can stop or slow the accumulation of interest. A borrower who takes out $ 20,000 in unsubsidized federal student loans at an interest rate of 6% could find himself owing nearly $ 25,000 by the time he graduates from a four-year program. Paying off this balance over a standard 10-year repayment period would cost the borrower over $ 33,000.
The problem of interest accrual can run even deeper for borrowers in income-based repayment plans, which are programs that allow borrowers to repay their loans based on their income. Some opponents of immediate student loan cancellation see income-oriented repayment plans as viable options that already exist as alternatives to massive debt cancellation, as these programs are already causing the loan to be canceled. expiration of their repayment terms (which are usually 20 or 25 years). ). But under federal law, interest continues to accrue for borrowers when repaying under these plans, which can have far-reaching consequences.
A borrower with $ 50,000 in federal student loans with an annual income of $ 40,000 per year and a family of 2 would have monthly payments under the Pay As You Earn (PAYE) plan of approximately $ 130 per month. But at an interest rate of 6%, the interest would accrue on the loan balance at the rate of $ 250 per month. So even if the borrower makes payments and remains in good standing on the loans, the overall balance increases at the rate of $ 120 per month. Over time, this increases the borrower’s total loan obligation by thousands of dollars. After 10 years of payments, the total loan balance would be greater than $ 64,000, although the borrower has made payments of more than $ 15,000 on the original loan balance of $ 50,000. After another 10 years of payments, the borrower might be eligible for a loan forgiveness, but could be taxed on an even higher overall balance. Meanwhile, the possibility of paying off their outstanding loan obligation in full would become increasingly remote over time.
Reed argues that eliminating all federal student loan interest could be a viable solution to this problem and could have the added effect of reducing the sprawling student loan bureaucracy. “Zero interest would be easy to manage,” Reed wrote.
Reed also argues that eliminating interest on student loans may also have more political appeal than simply forgiving student loan debt. People would still be “responsible for their decisions,” he wrote. “But by recognizing that things have escalated over the past two decades – public disinvestment in public higher education, in particular – we might stop trying to profit from debt. Pay back everything you borrowed, but only what you borrowed … There is a simplicity and fairness to this proposal that could make it politically feasible and sustainable.
Indeed, there is some evidence that such a proposal might have bipartisan appeal. Republican Senator Marco Rubio offers eliminate federal interest on student loans last year; he proposed replacing the interest with a one-time flat-rate origination fee payable over the life of the loan.
However, Rubio had proposed this as a change for newly issued federal student loans, not for loans that had already been disbursed to borrowers. It is unclear whether he and other Republican senators would support such a move now for federal student loans that are already in the process of being repaid.
Additionally, removing interest on student loans would not necessarily boost borrowers’ economies, even if it would reduce monthly payments or the cost of repayment for some, nor would it necessarily resolve the deep racial disparities in higher education that are of concern. advocates for student borrowers.
“Interest is not the main thing that hurts low-income borrowers and delinquent borrowers,” said Persis Yu, director of the student loan aid project at the National Consumer Law Center. “It’s the existence of the debt that is the real problem. A lot of our clients can’t afford $ 5,000 or $ 50,000. Our clients need the total debt to be extinguished, and even $ 20,000 of forgiveness would eliminate the debt of about 79% of defaulting borrowers.
Still, if interest elimination enjoys bipartisan support, Biden might see it as an attractive alternative – or even a complement – to adopting a sweeping student loan forgiveness. It could then focus executive action on correcting, improving and possibly expanding existing student loan cancellation programs such as borrower defense until repayment (which allows borrowers defrauded by their schools to eliminate their federal student loans) and the cancellation of public service loans, two programs he voiced. strong support for.
Biden has not yet indicated whether he would support eliminating interest on student loans. However, if such a proposal did not gain enough bipartisan ground, Biden would be faced with the same decision he faces today regarding student loan debt cancellation: to proceed with sweeping executive action or simply bypass them. edges of the problem.