For Immediate Release
August 2, 2022
Contact: Andrew Farnitano, 925-917-1354, firstname.lastname@example.org
New Report: Federal Government Can Eliminate Interest and Put Student Loan System on Sound Financial Footing
Hildreth Institute report highlights the role of increased interest payments in the student debt crisis, outlines options to provide relief without loss of revenue
BOSTON – While the Biden Administration and policymakers continue to work on ways to address the debt burden of current student loan borrowers, the Hildreth Institute released a report today on the crippling impact interest has on student debt, calling for leaders to offer no interest student loans as a key step toward providing economic relief to both current and future borrowers.
According to the report by the Massachusetts-based non-profit, titled ‘Losing Interest,’ interest payments are taking up a larger portion of student loan payments than ever before – with nearly one-quarter of all payments made in 2019 going to interest. Interest payments alone skyrocketed from $13.1 billion in 2015 to $22.4 billion in 2019.
An increasingly large share of student borrowers are unable to pay down their loan principal. Part of the reason is because of negative amortization, which happens when interest is accumulating faster than borrowers are able to make payments on their loans. This accumulated interest is added to the principal amount, compounding interest and causing already struggling borrowers to see their repayments increase.
“Under the current system, many student borrowers see their outstanding balances grow even as they make their monthly payments,” said Bahar Akman Imboden, PhD., Managing Director of the Hildreth Institute and author of the report. “Low-income students and students of color are disproportionately impacted by this. In fact, 20 years into repayment, the median Black borrower still owes 95 percent of the amount they borrowed, while the median white borrower has almost paid off their entire loan. Coupled with market labor discrimination and occupational segregation many of these borrowers face, negative amortization plays a role in further exacerbating racial disparities.”
Many borrowers having a hard time paying their student loans turn to Income-Based Repayment (IBR) Plans, which offer lower monthly payments. While providing short-term relief, extending these loans builds up additional interest – offsetting the gains with the borrower paying much more than their principal.
The Hildreth Institute report outlines one innovative step policymakers can take: removing the interest obligation from student borrowers. With the ‘no interest student loan’ plan outlined in the report, the federal government would lend no interest loans to students, to be paid back with a regular monthly payment over a set period of years.
To offset the cost of eliminating interest on student loans, the federal government would invest principal repayments in a risk-free asset. The investment and the interest incurred on the investment would generate a return to cover administrative costs and issue new loans. In fact, depending on the length of the investment, the return generated could exceed those costs, which could help provide more need-based grant aid to students.
“As federal policymakers debate how to rein in this crisis, we need to consider innovative solutions that not only eases the burden on current borrowers, but gives future students the ability to get an education without plunging into debt,” said Bob Hildreth, founder of the Hildreth Institute. “Eliminating interest is not going to end the student loan crisis. But, it’s one way we can make it easier and less expensive for students. We understand that a critical component to the success of this program is identifying an offset, and this plan will not only put the student loan financing system on stronger financial footing, but has the potential to generate enough revenue to help more students in need.”
The Hildreth Institute report estimates that for the average student borrower on an IBR Plan with $35,000 in student loans, a no interest student loan plan would reduce their monthly payments from $327 to $145. Under this model, removing interest payments would also save the student borrower on an IBR plan at least $18,500 over the lifetime of their loan. Finally, a no interest loan repayment plan would help simplify the process by installing an easier repayment system that takes the guesswork out of how much is owed and how much is due.
Hildreth Institute is a non-profit, nonpartisan organization dedicated to restoring the promise of higher education as an engine of upward mobility for all. We believe that all students should be able to obtain a high-quality, zero-debt postsecondary education. At Hildreth Institute, we fight for zero-debt college because we believe that student loans are not the right financial aid tool for our students or their families. We need to move to a zero-debt system that makes high-quality college affordable to all, without leaving students mired in debt.
We research, develop, and promote solutions for changes in public policies and institutional financial practices that will reduce costs to students and improve quality. Through partnerships with researchers and policy experts, with politically diverse organizations, with policy makers from both major political parties, and with corporate and community leaders, we will build support for transformative change in higher education financing. Hildreth Institute is a member of the national Higher Ed, Not Debt coalition, a campaign of dozens of organizations dedicated to tackling the crippling and ever-growing issue of student loan debt in America.