As of September 1st, federal student loan borrowers in the United States saw the return of accumulating interest on their loans, marking a significant financial challenge for millions of Americans.
The suspension of both principal and interest payments had been in place since the passage of the CARES Act in March 2020, offering relief to approximately 43 million borrowers.
However, the recently enacted debt ceiling law officially ended this payment pause. With interest now accruing, borrowers are set to resume their loan payments on October 1st.
Debate in congress over student loan
This development has prompted calls for congressional action, as the burden of repaying a $1.7 trillion student loan portfolio will not only affect individual borrowers but also have broader economic implications.
The resumption of debt collection may lead to financial strain for borrowers, making it difficult for many to meet other financial goals, such as homeownership.
Student loan debt has become a significant barrier to entry for potential homebuyers, as high-interest rates and the weight of loan balances hinder mortgage eligibility, even for dual-income households.
Secretary of Education Miguel Cardona has taken steps to alleviate the impact of loan payment resumption, including the introduction of a new income-driven repayment (IDR) program aimed at reducing monthly payments for many borrowers.
However, the question remains: When will Congress take action to address the broader issue of student loan payments?
Historically, Congress has acted on a bipartisan basis to protect student loan borrowers from abrupt changes in interest rates.
Examples include the College Cost Reduction Act of 2007, which cut interest rates for undergraduate federal student loans, and the Student Loan Certainty Act of 2013, designed to prevent interest rate spikes.
Given the impending resumption of payments and the rise in Treasury rates for new loans, there is growing pressure on Congress to intervene once again.
Representative Peter Welch, a senior member of the House Committee on Education and the Workforce, recently introduced the Student Loan Interest Elimination Act.
This legislation, co-sponsored by 23 House members and Senator Peter Welch, aims to virtually eliminate interest on federal student loans for both current and future borrowers.
The proposed bill includes a revenue-neutral mechanism: instead of depositing borrowers’ principal and interest payments into the U.S.
Treasury General Fund, it suggests directing principal-only payments into a revolving trust fund. This fund would invest in low-risk securities, with gains used to offset the costs of the student loan program, ensuring no negative impact on the federal deficit.
As the debt collection machinery restarts, borrowers face the prospect of watching their debt increase due to accumulating interest.
Congress is under increasing pressure to address this issue by eliminating interest on federal student loans, a solution seen as both sensible and balanced in response to the impending challenge.
The benefits of such a legislative move are expected to become evident on October 1st, providing much-needed relief for borrowers navigating the complexities of student loan repayment.