There’s a better solution for student loans than forgiving debt, experts say

President Biden is considering forgiving $10,000 in student loans per borrower, but eliminating interest on the debt could be a more effective way to reduce the financial burden, according to experts.

The impact of 0% interest has been apparent amid the pandemic freeze on student loan repayments, which is scheduled to end on Aug. 31. With interest eliminated, borrowers saved $37.8 billion through the end of the last year. And in the first quarter of 2022, the total national student loan debt increased just 1.95%, the lowest rate in at least two decades, according to the Education Data Initiative.

“Zero interest is another way to soften the blow of repayment and help borrowers out so their payments aren’t as big and their loan isn't as costly,” said Jan Miller, president at Miller Student Loan Consulting.

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The average federal student loan debt in the US is currently $37,113. With a 5% interest rate, that loan will accrue $10,124 in interest over ten years, according to Student Loan Hero’s calculator. However, many people take longer than that to pay back their loans, leading to additional interest. 

For those with about that much debt or more, having 0% interest would probably save them more money in the long run than $10,000 in forgiveness, said Michael Kitchen, a loan expert at Student Loan Hero. Even for those with a smaller total, spending less money on interest would help them pay back their debt faster. 

“It’s very much a case-by-case thing, but if you have a lot of student loan debt and it’s been piling up over the years, in that case the interest is going to weigh really heavily,” he said. “It could be a big deal to have no interest on it.”

Biden campaigned on a pledge to forgive student debt and, while he’s extended the freeze on interest and payments, he’s under pressure to announce a more permanent fix. Opponents, meanwhile, have argued against forgiving the debt. Betsy Mayotte, the president of the Institute of Student Loan Advisors, said she’s been “a bit flummoxed” that more politicians haven’t rallied around interest-rate reform. Many of her clients would prefer that approach, she said.

For many of the 43.4 million Americans with student loan debt, the principal balance of their loan stings, but it’s the compounding interest that prolongs the pain. Sometimes, monthly payments don’t even make a dent in the original debt.

That’s the case for Shelton Hall, a 42-year-old from Atlanta, who works in IT. He graduated in 2002 with $70,000 in federal student loan debt, and still owes that same amount 20 years later.

“I have no problem paying it back, but it just feels like I'm never going to,” he said. “I think I'll be paying back into retirement.”

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Eliminating interest would also help new borrowers. The rate on undergraduate loans rose to 4.99% for the 2022-23 school year, up from 3.73% last year, as the Federal Reserve hikes its benchmark rate in an attempt to lower inflation.

Last year, Rep. Joe Courtney, a Democrat from Connecticut, introduced a bill that would extend the 0% rate through 2024. “Interest really is the termite in the system, in terms of trapping people in loans that they can't get out of,” he said. “Since the government holds the debt, there's really in my opinion little or no justification for charging interest to begin with.”