What if Federal Student Loan Interest Rates Just Stayed at 0% Forever?
Federal student loan borrowers won’t have had to pay a dime of interest on their debt for nearly two years by the time the pandemic-era forbearance period ends in February.
While most of the focus on this relief has been on how borrowers have been able to skip payments altogether, data from the Department of Education suggests that not having to pay interest has saved borrowers more than $90 billion so far.
For those who’ve been able to take advantage of the interest-free period, it’s been a powerful opportunity to make headway paying down their debt. At the very least, it’s been a chance for millions of borrowers to finally stop watching their balances grow, despite making regular payments.
“It really is true that interest is what kills you,” says Mark Huelsman, a fellow at the Student Borrower Protection Center. “When people can actually pay down debt, they start thinking of their own finances in a different way. They start saving for long-term needs.”
There’s been much debate over the past few years regarding major student debt relief proposals, like widespread cancellation, versus smaller changes, like improving repayment options. But not much has been said for a measure like permanently removing interest on federal student loans altogether. Now that it’s already been in place for over a year, could 0% interest on federal loans be a solution to the $1.7 trillion student debt crisis?
Why do federal student loans even have interest rates?
Since 2013, interest rates on new federal loans have been set each year, based on current market conditions. (More specifically: they’re based on the 10-year Treasury note with a fixed add-on rate for each type of loan the government offers.)
According to figures originally obtained by Slate that Money later confirmed, in 2019 (the last “typical” year for student loan repayment), federal borrowers paid more than $70 billion back to the government. (more…)