On Sept. 1, interest began to accumulate for federal student loans again, marking an unwelcome milestone for family budgets.
Since March 2020, when the COVID CARES Act passed with overwhelming bipartisan support, student loan payments—both on the principal and on the interest—have been suspended for approximately 43 million student loan borrowers across the country. The CARES Act’s “payment pause” was extended numerous times by former president Trump and then President Biden over the ensuing three and a half years.
That respite officially ended as part of the recently enacted debt ceiling law. Under the terms of the so-called Fiscal Responsibility Act, the accrual of interest started Sept. 1 (happy Labor Day!), and the resumption of payments will begin Oct. 1.
With the reactivation of debt collection on a portfolio of $1.7 trillion for 43 million borrowers, there are many reasons for Congress, on a bipartisan basis, to reduce the consequences this will have at both the macroeconomic level for the country and the micro level for borrowers and their families. Paying the bill for that amount of debt will significantly stress borrowers’ budgets, and the fallout will ripple beyond just the plight of those 43 million Americans. Ask any real estate agent, and they will tell you student loan debt is one of the biggest barriers for new home buyers. Qualifying for a mortgage, even for dual-income families, is beyond reach for many because of the overhang of student loans and high interest rates.
President Biden’s secretary of education, Miguel Cardona, is doing what he can within his authority to soften the blow of loan payment resumption, including the launch of a new income-driven repayment (IDR) program that will substantially lower many borrowers’ monthly payments. Despite this welcomed relief, a question remains for those not enrolled in IDR: When will Congress act to mitigate the student loan payment snapback?
That is a reasonable question.
Recent history abounds with examples of bipartisan congressional action to protect student loan borrowers from debt cliffs. In 2007, Congress passed the College Cost Reduction Act, which cut interest rates for undergraduate federal student loans in half, from 6.8 percent to 3.4 percent. After that five-year measure expired, Congress passed the Student Loan Certainty Act of 2013 to intercept a snapback to a higher interest rate. In 2023, with legacy payments about to resume and higher Treasury rates kicking in for new loans (5.5 percent for undergraduates this academic year), it is blindingly obvious that Congress must intervene as it has in the past.
As a senior member of the House Committee on Education and the Workforce who worked on both the 2007 and 2013 laws, I believe it is time for Congress to finally acknowledge that tinkering with interest rates ignores the bigger picture: charging interest on these loans only benefits the U.S. Treasury’s coffers. Generating revenue for the Treasury was never the intent of the federal student loan program when it was created in 1965. Instead, the intent was to help aspiring college students coming from low-income families qualify for a loan to pay for their education. Nominal interest was initially charged to cover the cost of the program—not to create a windfall of federal revenue.
In July, I introduced the Student Loan Interest Elimination Act alongside Senator Peter Welch and 23 House co-sponsors. The bill would virtually eliminate interest on federal student loans for current and future borrowers. The fact that this measure works both prospectively and retrospectively is different than the debt-forgiveness plan that the U.S. Supreme Court rejected in Nebraska v. Biden, which only addressed existing debt.
Importantly, the bill includes a “pay for” to address the revenue loss.
Here’s how it works: rather than having borrowers’ principal and interest payments deposited in the U.S. Treasury General Fund, the borrowers’ principal-only payments would be deposited in a revolving trust fund, where they would be invested in low-risk securities. The gains on those investments would be used to defray the costs of the student loan program, thus avoiding a negative impact on the federal deficit. Such a mechanism is used today to fund the National Railroad Retirement program, whose solvency was recently certified for the next 25 years, as reported by the Congressional Research Service.
The benefits of my new bill will become very real on Oct. 1. Turning the debt collection apparatus back on will put borrowers on a hamster wheel where more borrowers will see their debt increasing rather than decreasing, as we saw for years prior to the 2020 payment pause. The culprit, of course, is interest accumulation. At both a human level and a macro level, Congress cannot simply look the other way as loan payments resume. Eliminating the cancer of interest on these loans is an intelligent, balanced response to this imminent threat.