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Rubio Reintroduces Legislation to Eliminate Interest on Federal Student Loans

By Hugh T. Ferguson, NASFAA Staff Reporter 

As discussions surrounding the student loan landscape remain at the forefront of congressional chatter, Sen. Marco Rubio (R-Fla.) has reintroduced a student loan repayment bill that would aim to rework the repayment system by making adjustments to the monthly repayment plans.

The bill, the Leveraging Opportunities for Americans Now (LOAN) Act, would eliminate interest on federal student loans, replacing it with a financing fee which would be equal to the amount the loan costs to service, paid over the life of the loan. The financing fee would not increase over the life of the loan and the bill would not eliminate the current student loan origination fee.

“It’s time to update our federal student loan system, because fear of debt should never stand in the way of an education and the pursuit of a better life,” Rubio said.

This change would be implemented for new loans made on or after July 1, 2022. Borrowers who were actively enrolled prior to that date would be able to borrow loans under the current system or could choose to borrow loans under the LOAN Act program.

Rubio first unveiled this legislation in 2019 but the bill did not garner any cosponsors in the Senate.

Stay tuned to Today’s News for more coverage of legislation concerning student loans. 

 

Publication Date: 8/6/2021


Peter G | 8/9/2021 3:33:20 PM

To David's comment: "Banks and mortgage companies charge interest on loans because they lend to make a profit."

That's partly true - interest also reflects time value of money/interest and also risk. In finance there's a distinction between the "nominal" (i.e. published) interest rate and the "real" interest rate which is a lower rate that reflects that a chunk of charged interest is just off-setting inflation.

But you don't need to be a believer in high finance to agree in practical terms that $1,000 today is more valuable than $1,000 ten years from now.

Peter G | 8/9/2021 3:7:55 PM

Important to note that if (big if) this actually did advance, it would likely see debate and modification, so at this point the focus should arguably be on whether the concept itself is any good.

As in 2019, I think the core concept is fine of charging borrowers for actual costs, and actually is sort of intriguing.

But the actual execution being proposed (charge a flat up-front fee and then rebate it for those who payoff early) is going to confuse the heck out of people, vs. say having a monthly servicing fee on the back end which would more closely model other payment structures people are used to.

I'm also not sure at first pass it deals with inflation, since in theory the cost of servicing will increase over time but then arguably the current model has issues with that as well.

David S | 8/6/2021 6:14:00 PM

James C - bingo. That's the only way to repay your student loan in the UK, Australia and New Zealand, and it works just fine.

Paul F | 8/6/2021 5:44:27 PM

Interest by any other name costs (at least) the same...

James C | 8/6/2021 1:24:20 PM

How about no fees and your income based loan payment comes out of your paycheck right to the US Treasury eliminating the corporate welfare paid to the loan servicers.

David S | 8/6/2021 10:37:03 AM

This extra fee is the cost of servicing the loan? Has Marco checked to see how much ED pays loan servicers? Did he provide any data comparing the servicing cost to the interest students current pay? Would this eliminate any advantage in paying the loan down early? And if borrowers must pay for servicing, then just what are they paying an origination fee for under this plan? Colleges are accused of a lack of transparency when it comes to fees, but what are students paying for with the origination fee?

Here's my interest-free loan proposal; for every $1,000 you borrow, you receive $1,000 and you repay $1,000. Banks and mortgage companies charge interest on loans because they lend to make a profit. The government shouldn't be using the same model. Student loans weren't created to make a profit, they were created as a public service.

Joe B | 8/6/2021 8:21:33 AM

What a missed opportunity to convert the origination fee into just another piece of the finance fee. Rubio clearly has never had to explain to a student why he isn't receiving the amount that he borrowed.

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