Capping Student Loan Interest Would Cost Billions, Help Well-off Borrowers

Representative Anna Paulina Luna (R-FL) announced on Wednesday that she would file a discharge petition on her proposal , cosponsored with Representatives Mike Lawler (R-NY) and Jared Moskowitz (D-FL), to lock the federal student loan interest rate at 2 percent. Should a majority of House members sign the petition, the procedural move would force the measure to a floor vote, possibly over leadership’s objections. The interest rate cut has populist appeal—who wouldn’t want to make student loans more affordable?—but the reality is that the scheme has all the same problems as the Biden administration’s disastrous and largely failed loan-cancellation agenda. Not only is it costly, but the benefits mostly flow to well-off borrowers. What’s more, Republicans already passed an effective measure to address the very problem Rep. Luna identifies —“runaway interest [turning] federal student loans into a debt trap”—at a much lower fiscal cost. Let’s start with the cost to taxpayers. The proposal would automatically establish a 2 percent interest rate for all outstanding and future federally-held loans, while those with bank-held federal loans could refinance at the lower rate. The Congressional Budget Office hasn’t produced an official cost estimate for this plan, but some back-of-the-envelope math suggests the bill could be in the tens of billions. The COVID-19 payment pause set all student loan interest rates at 0 percent, which cost $60 billion per year . If setting rates at 2 percent cost even half that, the annual cost would be $30 billion—three-quarters as much as the government spends on Pell Grants every year. Who would benefit? Capping interest rates proportionately helps borrowers with more debt—but those with hundreds of thousands of dollars in student debt tend to be people with high-cost professional degrees: doctors, dentists, and lawyers. Those with only a bachelor’s degree borrow around $30,000 on average. For this reason, the distribution of student debt, and hence the benefits of an interest rate cap, is highly skewed : just 8 percent of borrowers owe more than $100,000, but they account for 42 percent of outstanding federal loans. To be sure, not every borrower with a six-figure debt burden has high earnings potential: think of the Columbia University graduates who borrowed $180,000 for a film degree. And runaway student loan interest has been a real problem . While income-contingent repayment plans set monthly payments at low levels, borrowers may still see their balances rise if their payments do not fully cover accrued interest. But Republicans already passed a sweeping package of reforms last year to deal with these problems. In the One Big Beautiful Bill Act, Congress created the Repayment Assistance Plan , which comes online in early July, to guard against runaway interest accumulation. The plan sets payments at a low share of income and waives any unpaid interest to ensure balances don’t rise. This creates a safety net for lower-income borrowers, whose payments are less likely to cover interest, while still requiring higher-income individuals to pay their fair share—interest included. Capping student loan interest rates at 2 percent is overkill. The plan would benefit well-off professionals far more than most struggling borrowers, especially since Congress has already enacted a plan to waive some interest for lower-income people. If lawmakers are keen to throw tens of billions at higher education, shoring up the Pell Grant program, which runs out of money next year, would be a much better use of funds. Setting student loan interest at 2 percent makes for an appealing soundbite. But it’s a terrible policy. The post Capping Student Loan Interest Would Cost Billions, Help Well-off Borrowers appeared first on American Enterprise Institute - AEI .