For more than a decade, Robert Layton has been making payments on the roughly $128,000 he borrowed to pay for college and graduate school. In that time, he estimates, he\u2019s paid about $63,000 \u2014 $45,000 of that in interest.\u00a0<\/p>\n
But the current balance on his government-owned loans stands at $219,000.<\/p>\n
Layton, who works in IT, graduated in 2009. In the years since, he\u2019s mostly paid back his loans using income-driven repayment, a program that borrowers can use to pay down their debt as a percentage of their income. He has opted for that program, instead of a more aggressive payment plan, because it\u2019s what he can afford. But Layton\u2019s monthly payments often aren\u2019t high enough to pay down the interest, which on his government-owned loans have rates as high as 8.5%.\u00a0<\/p>\n
<\/p>\n The experience of throwing money at the loan while watching the balance grow makes Layton feel like he\u2019s \u201cjust treading water,\u201d the 39-year-old said. He has put off having children and buying a new car because of the debt.<\/p>\n \u201cThe interest on it, it feels like it\u2019s something I can never catch up to,\u201d Layton said. \u201cI can\u2019t make any progress on these loans. It really makes you feel sort of hopeless.\u201d\u00a0<\/p>\n For many student-loan borrowers, Layton\u2019s experience might feel familiar. In 2020, only about 38% of young borrowers were making progress on their loans, compared to 5.6% of borrowers who saw their balances stay stagnant and 42.6% who actually saw it increase, according to research published in June by the Jain Family Institute, a nonprofit research organization.\u00a0<\/p>\n After a three-year respite from that dynamic during the COVID-era pause on student-loan payments, interest and collections, interest began accruing again on Friday. For borrowers, interest can often be one of the most troubling aspects of their student loans: Not only does it make the debt more complicated to manage, it also raises questions about the government\u2019s aims with the student-loan program.\u00a0<\/p>\n Over the past several years, some policymakers and experts have also expressed concern about the way the government approaches student-loan interest. At many points since the student-loan program\u2019s inception, lawmakers have used interest rates as a lever to ensure various political priorities, including funding grants, paying third-party companies involved in the student-loan program and rightsizing the cost of the student-loan portfolio.\u00a0<\/p>\n \u201cWe need to understand the government as a lender and as a policymaker, and [that] they kind of have competing interests in you as a borrower,\u201d said Louise Seamster, an assistant professor of sociology and African-American studies at the University of Iowa.\u00a0<\/p>\n On the one hand, \u201cin terms of investing in you as someone pursuing higher education for all the reasons that benefit the government, they want to make repayment reasonable,\u201d Seamster said. But some steps that could help borrowers the most, including not charging interest, \u201crun against the government\u2019s material interest in receiving financial flows which are primarily through interest,\u201d she added.\u00a0<\/p>\n Over the decades of the student-loan program\u2019s existence, the interest rates charged by the government have shifted, but the philosophy behind tacking interest onto the loans has remained the same. Though the idea behind the loan program is that the government subsidizes debt to make financing available to people who couldn\u2019t otherwise afford college, policymakers don\u2019t want the government to appear as if it\u2019s losing money on the loans.\u00a0<\/p>\n Any time Congress creates a loan program, budget scorers tell lawmakers whether or not the program costs the federal government money, said Robert Shireman, the director of higher education excellence and a senior fellow at the Century Foundation, a progressive think tank.<\/p>\n \u201cThe loan program is not free,\u201d Shireman said. \u201cEven if it all gets paid back, it has to be paid back with interest, because economists attach a time value of money.\u201d\u00a0<\/p>\n The financial principle of the time value of money says that having a dollar today is worth more to the government \u2014 or any other person or entity \u2014 than having it in a few years. Any delay in the government getting its money back has to be compensated through interest.<\/p>\n \u201cThat economic concept is part of government budgeting,\u201d Shireman said.\u00a0<\/p>\n In 1958, when the government got into the student-loan business for the first time, lawmakers set interest rates \u201cat a level that felt right to them,\u201d Shireman said. At the time, that was 3%. Once the student-loan program in the 1960s largely to one in which private lenders handed out the funds, but the government provided them with a guarantee that they wouldn\u2019t lose money, policymakers began to tie interest rates to a market indicator.\u00a0<\/p>\n Though a connection to the market remained \u2014 interest rates would typically be based on Treasury-bill rates plus a certain number of percentage points \u2014 policymakers tweaked interest rates over the course of the guaranteed student loan program based on certain priorities, Shireman said. In some cases, they might want more money to pay for Pell grants, the funds the government provides to low-income students to attend college. In other cases, they might need the money to subsidize the lenders and other organizations participating in the guaranteed-student-loan program, he added.\u00a0<\/p>\n Once the government moved to its current system of lending money directly to students, policymakers\u2019 thinking around the role of student-loan interest had more to do with how much revenue they expect the loans to bring in, he said.\u00a0<\/p>\n One of the more recent battles over interest-rate policy inspired Rep. Joe Courtney, a Connecticut Democrat, to believe it\u2019s possible to change student-loan interest rates to be more beneficial to students and borrowers, he said in an interview.\u00a0<\/p>\n \u201cThe branch of government that actually has the responsibility to address this issue is the House and the Senate, and I\u2019ve seen it happen in the past,\u201d he said.\u00a0\u00a0<\/p>\n In 2013, Congress passed a bipartisan bill to prevent student-loan interest rates from doubling after the expiration of a 2007 law that had reduced the rates. The 2013 legislation, signed into law by former President Barack Obama, put in place the current formula for how interest on student loans is calculated. Each year, the new rate is based on the May 10-year Treasury-note auction yield plus a certain percentage, depending on the type of loan.\u00a0<\/p>\n Loans students are taking out to pay for this upcoming academic year have the highest rates in several years. Undergraduate students will pay 5.5% in interest, graduate students will pay at least 7.05% and parents will pay 8.05%.\u00a0<\/p>\n The combination of this increase in rates for new loans and the resumption of student-loan interest has made it \u201cblindingly obvious\u201d to Courtney that \u201cCongress has really got to take a look at this and act,\u201d he said.\u00a0<\/p>\n In July, Courtney introduced the Student Loan Interest Elimination Act, which would set interest rates for existing federal student loans at 0%. New borrowers wouldn\u2019t pay more than 4% in interest, with rates based on a sliding scale tied to financial need. The majority of new borrowers would receive a 0% interest rate under the plan, his office said.\u00a0<\/p>\n Courtney said he\u2019s reached the point where \u201cthe interest cancer\u201d for student-loan borrowers has to be removed.\u00a0<\/p>\n \u201cFor most people in this country, even those who are uncomfortable with debt forgiveness, getting rid of interest is a consensus position,\u201d he said. \u201cIn past events where Congress actually acted, we were in a similar situation to what we\u2019re in today, which was sort of a countdown.\u201d\u00a0\u00a0<\/p>\n Courtney\u2019s bill aims to avoid battles over its cost by creating a mechanism to pay for it. Under his plan, the government would invest borrowers\u2019 principal payments into risk-free assets, creating a trust fund. That money would then be used to cover administrative costs and issue new loans.\u00a0<\/p>\n Bob Hildreth, the co-founder and co-chair of the Hildreth Institute, a research and policy nonprofit focused on higher education, came up with the fund\u2019s design. To Hildreth, who worked on debt restructuring as an economist with the International Monetary Fund, not charging interest is a key component of the plan, because interest can make it complicated for borrowers to manage their loans.\u00a0<\/p>\n When borrowers realize \u201cthey pay $500, and only $50 of that goes to lower their principal and the rest goes to interest, it\u2019s very discouraging,\u201d he said.\u00a0<\/p>\n In some ways, student-loan interest has become less relevant for government budget projections over the past few years, even as it looms over borrowers. That\u2019s because a large share of student-loan dollars \u2014 about 47% in 2022 \u2014 are in income-driven repayment plans.\u00a0<\/p>\n Just like Layton, many borrowers under these plans make payments that don\u2019t touch the interest on their debt. As a result, in both the borrower\u2019s eyes and the government\u2019s, a borrower\u2019s balance continues to tick up. If a borrower\u2019s income stays too low to service the debt, then theoretically, they\u2019ll have their balance canceled after at least 20 years of payments.\u00a0<\/p>\n From the perspective of government budget estimators, the amount that\u2019s canceled is tallied as a loss, and looks bigger because high interest rates and low payments fueled its growth. In these cases, student-loan interest doesn\u2019t serve as a tool to raise revenue for other priorities, because the government isn\u2019t collecting on it anyway. Instead, it\u2019s only operating as a mechanism to grow a phantom balance that it can be disheartening for borrowers to watch increase, advocates say.\u00a0<\/p>\n That dynamic is part of a \u201cshell game\u201d that budget estimators play when accounting for the student-loan program, said Mike Pierce, the executive director of the Student Borrower Protection Center, an advocacy group. In projecting the student-loan program\u2019s revenue, modelers often fail to take into account the cost of all eligible borrowers receiving cancellation and other benefits they\u2019re entitled to, he said.\u00a0<\/p>\n \u201cAll of that is baked into the model over time, in a way that makes the program basically take credit for cheating people out of their rights,\u201d he said.\u00a0<\/p>\n Then when borrowers do take advantage of benefits or receive cancellation at higher rates than expected, that appears as a cost to taxpayers, he said. In reality, it\u2019s just the government bringing in less revenue than it expected originally. Pierce described that cost as \u201cthe government doing its job: helping eligible borrowers invoke their rights to debt relief under the law.\u201d<\/p>\n \u201cAt some point, Congress needs to do some work here and recognize that the student-loan program is a giant mess, and the accounting for it doesn\u2019t make any sense,\u201d he said.\u00a0<\/p>\n The Biden administration recently took steps to protect borrowers from the experience of watching their balance grow going forward. Under a new income-driven repayment plan called SAVE, the government won\u2019t charge any interest that the borrower\u2019s payment doesn\u2019t cover.\u00a0<\/p>\n For Layton and borrowers like him, the plan is helpful in the sense that they\u2019ll no longer watch their balances grow. \u201cAt least it\u2019s not getting worse,\u201d he said. \u201cIt\u2019s a step in the right direction.\u201d\u00a0\u00a0<\/p>\n But his balance likely still won\u2019t come down.\u00a0<\/p>\n \u201cYou\u2019re being squeezed by this interest, and it doesn\u2019t feel like there\u2019s anything to do about it,\u201d he said. \u201cYou kind of just sit there and hope that the government will decide that it\u2019s gotten bad enough that they\u2019ll try to fix it.\u201d\u00a0\u00a0<\/p>\n<\/p><\/div>\nStudent-loan interest rates have shifted over time<\/h2>\n
Past congressional battles inspire new push for 0% loans<\/h2>\n
Interest looms over borrowers<\/h2>\n