The student debt forgiveness movement faced a setback when the Supreme Court rejected the Biden Administration‘s loan forgiveness plan. In response, many advocates have shifted their focus to a new proposal: canceling student loan interest. according to The Hill.
Canceling Student Loan Interest
Interest rates on student loans have been a point of contention, with critics viewing them as an unfair and burdensome expense for borrowers. Some advocates from both sides of the political spectrum believe that slashing interest rates could be a more moderate compromise compared to outright debt forgiveness. Recently, congressional Democrats introduced legislation aiming in canceling student loan interest rates to zero percent.
The push in canceling student loan interest has already influenced changes in income-driven repayment (IDR) programs implemented by the Biden administration. The IDR programs help low-income borrowers by reducing their monthly payments based on their income and family size. The changes made by the administration will increase the number of borrowers making no payments towards their loans, and crucially, these plans eliminate interest collection beyond the required monthly payments.
However, critics argue that canceling student loan interest rates is essentially another form of debt forgiveness. During the pandemic student loan payment pause, which suspended interest collection, the government incurred a substantial cost of $230 billion in foregone interest accrual. Additionally, canceling student loan interest rates could distort the financial system significantly.
Interest rates serve several essential purposes. First, they help the government recoup losses due to inflation. Without interest, the government could lose significant amounts when inflation erodes the value of loan repayments. Second, interest compensates lenders for the opportunity cost of lending money. Lastly, interest helps compensate lenders for the risk of default, especially since student loans have relatively high default rates compared to other types of loans.
While some argue that interest rates on student loans are too high, the government’s actual losses from the student loan program suggest otherwise. The loss of $200 billion since the late 1990s indicates that the interest rates might not be excessively high.
Proposal On Canceling Student Loan Interest
Another proposal for canceling student loan interest rates on student loans has also gained popularity. However, proponents ignore the unique characteristics of student loans, such as income-driven repayment plans, which allow borrowers to make payments that do not cover the accruing interest.
To address the student loan system’s challenges, advocates propose allowing borrowers to claim bankruptcy and imposing restrictions on loans. Providing a bankruptcy option to struggling borrowers, while limiting loan disbursements to individuals with better economic returns, aims to create a more merciful and fair system.
The current focus on mercy without proper accountability has led to a moral hazard, with some borrowers burdened with student debt despite low earning potential. Funding a college education for every individual isn’t working, necessitating a reevaluation of the entire system. Ultimately, any proposal about canceling student loan interest or reforming the system would come with significant government spending, requiring careful consideration and justification of further subsidizing higher education.