Would 0% Interest Federal Student Loans Work Better Than $10k in Debt Cancellation?

In the U.S., over 44 million people have outstanding student loan debt. With student loans being so common, it’s no surprise that student loan forgiveness has become a popular topic of conversation. A recent NPR poll found that 55% of the general public support $10,000 of loan forgiveness. 

However, the cost of such a measure would be high; President Biden’s plan to forgive $10,000 of federal student loans per borrower would cost taxpayers $373 billion. 

Because of the high cost — and because of the many borrowers that have far more than $10,000 of student loan debt — some experts propose charging no interest on federal student loans. A long-term student loan interest freeze could help borrowers save money and pay off their debt faster. 

The Problem With Interest on Student Loans

Student loans are unique in that borrowers can qualify when they’re quite young, without established credit histories or income. 

Those factors can lead borrowers to take out loans without fully understanding the terms or how interest can impact their repayment. 

College students can qualify for thousands in student loan debt. On a standard repayment plan, borrowers can pay back federal student loans over a 10-year period. But if the borrower enters an alternative payment plan — such as extended repayment or income-driven repayment — you’ll pay significantly more in interest over time

Measures That Would Eliminate Interest on Student Loans

During his campaign, President Biden had proposed $10,000 of loan forgiveness per federal borrower. However, opponents of this proposal say the measure would be overly expensive and wouldn’t address the root causes of the student loan crisis.

Politicians in both parties have proposed an alternative: instead of offering loan forgiveness, change the interest rates on federal loans to 0%. However, there are some differences in how they would structure the student loan interest freeze:  

• Leveraging Opportunities for Americans Now (LOAN) Act: Senator Marco Rubio, a Republican from Florida, introduced the LOAN Act in August 2021. Under his proposal, student loans would be set at 0% interest, but they’d have one-time financing fees. Borrowers that repay their loans early would get a credit or refund for the amount of the financing fee, and income-driven repayment plans would be the default repayment plans for borrowers. The LOAN Act has not made progress since its introduction. 
• Zero-Percent Student Loan Refinancing Act: Proposed by Representative Joe Courtney, a Democrat from Connecticut, the Department of Education would provide 0% refinancing to federal student loan borrowers through December 31, 2024. This act was introduced in May 2021, but it hasn’t made progress since then. 

While neither measure has progressed in the Senate or the House, proposals like these have become a focal point in recent months as conversations continue about how to help student loan borrowers. 

How a Student Loan Interest Freeze Would Help Borrowers

Depending on a borrower’s balance and interest rate, measures that would eliminate interest on student loans may be more effective than student loan forgiveness in some cases. And because the government wouldn’t have to forgive balances, there may be a lower cost to taxpayers. 

According to Experian, borrowers have an average student loan balance of $39,487. If a borrower had that amount of debt with a 5% interest rate and a 10-year repayment term, they’d repay a total of $50,259. Interest charges would add over $10,000 to their overall repayment cost, so a 0% interest rate would save the borrower more money than $10,000 of loan forgiveness. 

Borrowers with higher balances or higher interest rates — such as individuals with Parent or Grad PLUS loans — would get even more relief from a student loan interest freeze. 

3 Other Options for Managing Your Loans

Although student loan forgiveness measures continue to be widely discussed, they haven’t come to fruition yet. If you need help managing your loans right now, consider these alternatives: 

Make Extra Payments

If you can afford to pay a little extra toward your loans — even $20 per month can help — you can cut down on the amount of interest that accrues on your loans and pay off your debt earlier. 

For example, a borrower with $39,487 in loans at 5% interest and a 10-year term would have a monthly payment of $419. If the borrower paid $20 extra per month — a total payment of $439 — they’d pay off their loans seven months sooner and save $665. 

Stick to Standard Repayment

Although getting a lower payment can be appealing, enrolling in an income-driven repayment plan or extended repayment plan can prolong how long you’re in debt. And depending on your payment amount, you may repay more over time. If possible, stay on a standard repayment plan to get out of debt faster. 

Refinancing

If you have high-interest student loans, another option is to refinance your debt with a private lender like Education Loan Finance. If you have good credit and reliable income — or a co-signer that can apply with you — you could qualify for a loan with a lower interest rate than you have now. Over the life of your loan, the lower rate can allow you to save a substantial amount of money. 

Just keep in mind that refinancing federal student loans has some drawbacks: you’ll lose eligibility for federal loan benefits, and you won’t be eligible for future payment freezes or federal loan forgiveness measures. 

If you decide to refinance your loans, you can view your options and rates with the Find My Rate tool.