Student Loan Update: Democrats' Plan Would Erase Thousands in Debt Interest

Ahead of the resumption of student loan payments, a new Democratic proposal seeks to lower the cost of these loans by eliminating interest for thousands of borrowers.

The Student Loan Interest Elimination Act will refinance the interest on federal student loans for all existing borrowers to zero percent and cap interest rates for future borrowers, Representative Joe Courtney and Senator Peter Welch said in a joint press release.

"Thanks to this fix, 43 million Americans with existing federally held student loans would see their interest rates immediately eliminated," the Democratic lawmakers said. "This sliding scale will disincentivize students from taking out loans that they do not need. Importantly, the bill establishes a Trust Fund to pay for the student loan program's administrative expenses that are currently covered by the interest paid by borrowers."

The capped interest rates for future borrowers will be based on "a sliding scale determined by financial need," and no student will have an interest rate higher than 4 percent, according to the release.

In June, the U.S. Supreme Court struck down President Joe Biden's student loan cancellation plan, which sought to forgive debt up to $20,000. The plan would have canceled up to $400 billion in student loans for thousands of borrowers. But the Court's 6-3 conservative majority ruled that Biden and Education Secretary Miguel Cardona overstepped their authority with the plan, which was to be implemented without congressional approval.

After the Court's ruling, many Democrats called on Biden to take further action to alleviate student loan debt. Biden and the Department of Education have several different income-drive repayment plans currently in place that lower the cost of student loans based on a person's income and family size.

In announcing the proposed legislation, Courtney said, "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."

He continued: "This bill is particularly important in the wake of SCOTUS' decision to strike down President Biden's student loan forgiveness program. Students and families are counting on Congress to act on commonsense solutions to lower the cost of college and my bill will help achieve that goal."

Learn more: Student Loan Forgiveness Updates and FAQs: Who Qualifies and How To Apply

While Courtney cited average interest of $7,800 over 10 years, interest rates vary depending on the type of loan taken out by a student, according to the Education Department's Federal Student Aid website.

Daily interest is calculated by multiplying a loan balance by the number of days since the last payment made by a student, then multiplying that result by the interest rate factor (the loan's interest rate divided by the number of days in the year), the website says.

Welch, who is from Vermont, said in the joint release, "By reducing the interest rate on existing federal student loans and capping future interest rates, the Student Loan Interest Elimination Act makes an affordable college education a reality for more students in Vermont and across the United States."

Newsweek reached out to Welch's office via email for comment.

Contacted for comment, Courtney's press office directed Newsweek to a recent interview he had on Connecticut radio station WTIC.

"I think as this thing marinates out there, I think it's going to become a much more appealing option because it has no deficit impact and it gets an unacceptable situation fixed," he told the station.

The Connecticut Democrat continued: "Number one, it would allow people to refinance down to just basically pay principal balance and also, for new students, put them in a different place in terms of just being obligated to pay for principal interest."