United States Capitol.
Our nation’s student debt crisis is a multi-faceted issue with several factors that make it considerably worse over time. Rooted in the problem is the rising costs of higher education, which are difficult for families to estimate or plan for.
There are also more and more college degrees that have a negative return-on-investment (ROI) each year, which leave students paying huge sums for degrees that don’t lead to higher earnings or better job opportunities.
There’s also a problem when it comes to both federal and private student loans, both of which can allow students or their families to borrow considerable sums of money on a massive scale. And, of course, student loan interest rates also play a role in where we’re at right now — especially rates from the last few years.
For new Direct Loans disbursed on or after July 1, 2024, and before July 1, 2025, for example, interest rates are as follows: 6.53% for undergraduate Direct Subsidized Loans and Direct Unsubsidized Loans, 8.08% for Direct Unsubsidized Loans for graduate or professional students, and 9.08% for Direct PLUS loans for parents and graduate or professional students.
Beyond the higher student loan rates we have seen in the last few years, the way rates are set throughout the life of the loan also doesn’t help. Because federal student loan rates are fixed throughout the entire repayment term, borrowers who were forced to “lock in” much higher rates are essentially stuck with them until they’re paid off.
GOP Congressman Wants To Slash Student Loan Interest Rates To 1%
While lawmakers really need to tackle all the aspects of higher education to solve our student loan debt crisis, elected officials have some ideas for tackling part of the mess in 2025. One of the latest “solutions” is a call to dramatically decrease student loan interest rates for all borrowers in 2025, regardless of income.
The Affordable Loans For Students Act, which was sponsored by New York Congressman Mike Lawler, would automatically drop most federal student loan interest rates to 1% for remaining loan balances.
According to a press release on the bill, the Affordable Loans For Students Act would also help borrowers refinance non-Direct federal student loans, such as FFEL-program loans, into the new program in order to qualify for 1% interest. This part is important since rates on FFEL loans can be as high as 9%.
Rep. Lawler appears to offer this as an alternative to the student loan forgiveness plans introduced by the Biden administration, most of which were doomed to fail from the start.
However, this bill would leave some forgiveness programs for federal student loans intact, including Public Service Loan Forgiveness (PSLF) and forgiveness available through remaining income-driven repayment plans.
Who Would 1% Student Loan Rates Help?
Lowering interest rates on federal student loans to 1% has the potential to help anyone who is making a non-income driven payment on their loans. How much this helps a borrower save would hinge on factors like how much they owe, the repayment plan they’re on, and the interest rate(s) currently being charged on their loan(s).
As an example, imagine a borrower has $30,000 in student loans at a 6.5% interest rate and they’re repaying their loans over a standard, 10-year repayment plan. In this case, they would pay $341 per month on their loans over the course of 120 months. Total payments made would work out to $40,877 during that time, which means they would fork over around $10,877 in interest payments only.
If you change the interest rate to 1%, on the other hand, their monthly payment drops to $263 and they pay just $1,537.50 in interest over the 10-year repayment period. Of course, borrowers who owe considerably more on their student loans, have higher interest rates, or both stand to save even more if student loan interest rates are cut down to 1%.
Unfortunately, dropping student loan rates to 1% wouldn’t necessarily help borrowers who are repaying their student loans on income-driven repayment plans (which is roughly half of student loan borrowers).
Since income-driven repayment plans base student loan payments on factors like a borrower’s “discretionary income,” a lower interest rate won’t change their monthly payments.
Furthermore, a lower interest rate has the potential to impact student loan forgiveness at the end of these income-driven repayment plans. While counter-intuitive, borrowers on these plans actually benefit from having larger loan balances, since it increases their ability to benefit from insolvency and avoiding the potential tax bomb.
A lower interest rate would lower their outstanding loan balance, but increase the likelihood that more borrowers would face an increased tax liability than under current plans.
Should Student Loan Interest Drop To 1%?
With the upcoming Trump administration unlikely to introduce or support broad student loan forgiveness measures outside of the plans that exist today, having student loan interest drop to 1% may be the best thing borrowers could hope for. This is especially true since the Saving On a Valuable Education (SAVE) income-driven repayment plan will potentially be struck down by the courts in the coming months.
Lawler’s office also points out that Public Service Loan Forgiveness (PSLF), Income-Based Repayment, and the Total and Permanent Disability Discharge program are “all rooted in federal statute,” which means they are likely to stick around.
It remains to be seen if this bill has what it takes to become law, and how the student loan landscape might shake out if it does.
Also note that this isn’t the only Republican plan suggested to help ease the burden of student debt. Last year, the College Cost Reduction Act was introduced by Rep. Virginia Foxx (R-NC).
This bill also has some promising components that could help with our student loan debt crisis, although it has some problematic ideas as well. For example, the College Cost Reduction Act would double the maximum Pell Grant award for eligible borrowers and prevent interest from capitalizing on student loans. It would also require students to pay back only what they would owe on a 10-year standard repayment plan.
However, the bill would also put an end to the Federal Supplemental Educational Opportunity Grant program and to PLUS loans for parents and graduate students.