Student-loan borrowers' interest rates would be 'immediately eliminated' if Democratic lawmakers' new bill is passed

• A pair of Democrats introduced a bill to eliminate interest on existing federal student loan balances.
• It would also cap interest at 4% for future borrowers.
• Interest on federal balances will begin accruing again in September after a more than three-year pause.

A pair of Democratic lawmakers want to get rid of the interest that keeps student-loan borrowers' balances growing.

Last week, Connecticut Rep. Joe Courtney and Vermont Sen. Peter Welch introduced the Student Loan Interest Elimination Act, which would refinance the interest on all existing federal loans to 0% and cap interest rates for futures borrowers.

"Thanks to this fix, 43 million Americans with existing federally held student loans would see their interest rates immediately eliminated," the press release said.

"Students and families are already saddling the rising costs of a college education. The federal government should not exacerbate the problem by making money off borrowers' federal student loans," Courtney said in a statement. "In fact, the average public university student who takes out a federal student loan today would pay $7,800 over the standard 10-year period in interest. That's the difference between making mortgage or car payments, affording medical care, or saving for a stronger retirement."

"This bill is particularly important in the wake of SCOTUS' decision to strike down President Biden's student loan forgiveness program," he added.

According to the legislation, the interest rates for future student-loan borrowers would be based on a "sliding scale determined by financial need," and no student would face an interest rate higher than 4%. The bill would also establish a trust fund to pay for the federal student loan systems administrative expenses that are currently covered by the interest borrowers pay.

Specifically, according to the fact sheet, trustees would invest borrowers' payments into a range of bonds, and the returns on those investments would fund operating costs of the student loan program. Any additional revenue from the fund would be used to increase the value of Pell Grants, along with other grants to support college completion.

This bill in particular does not yet have bipartisan support, but some Republican lawmakers have previously expressed concerns with surging interest. In June, top Republican on the House education committee Virginia Foxx introduced the Federal Assistance to Initiate Repayment — or FAIR — Act, which would prevent "excessive interest accrual" and waive borrowers' remaining balances if they already paid back more than they originally borrowed in principal and interest. 

This legislation comes as interest on student-loan payments is beginning to accrue again in September, with borrowers resuming payments one month later. After the Supreme Court struck down President Joe Biden's broad plan to cancel up to $20,000 in student debt for federal borrowers, some lawmakers were calling on him to keep interest paused during the 12-month "on-ramp" period, during which borrowers who miss payments will not be reported to credit agencies.

"I would like to see interest payments suspended during this time, especially during that 12-month ramp-up period," New York Rep. Alexandria Ocasio-Cortez said in June. "There are millions of people in this country that have student-loan debt amounts under ten or $20,000, as outlined in the plan. People should not be incurring interest during this 12-month on-ramp period, so I highly urge the administration to consider suspending those interest payments."