Federal law gives Congress the power to set federal student loan interest rates, not the president. This means Biden cannot make interest rate changes permanent.
When President Biden announced his administration’s plan for widespread student loan forgiveness, many student borrowers talked about the interest on their loans.
Students who borrow frequently stories told on payment many times more than they originally borrowed, with some admitting they still have to repay their student loan even after paying way beyond their principal.
Some people have pointed to the 0% interest rates under the ongoing student loan pause as proof that Biden can eliminate student loan interest rates.
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Can the president permanently change federal student loan interest rates?
No, the President cannot permanently change federal student loan interest rates.
WHAT WE FOUND
The President is not authorized to make permanent changes to federal student loan interest rates. That power rests with Congress, which uses formulas to automatically update rates each year.
“The reason President Biden hasn’t permanently cut interest rates as part of this is because he doesn’t have the power to do so,” said Betsy Mayotte, Founder and President of the Institute of Student Loan Counselors (TISLA). “Congress is the one that sets interest rates, they do so under federal law, and Congress is the one that should make a permanent change or permanently reduce interest rates.”
The US Department of Education explains that all interest rates for federal student loans issued to student borrowers since 2006 have fixed interest rates, meaning the interest rate will not change for the life of the loan. Loans taken out by students before 2006 have variable interest rates that change from year to year.
If an undergraduate student were to take out a federal student loan right now, their loan — after the payment break ends — will have an interest rate of 4.99%. There are different interest rates for graduate students and for parents depending on the type of loan they receive.
New rates are set every year, but the Ministry of Education claims that they are not set by them. They are set by federal law, the ministry says. Federal law is written and passed by Congress.
According ReadyEDU, a student loan information site, each year’s new interest rates are in effect from July 1 through June 30 of the following year. Congress signed the Bipartisan Student Loan Certainty Act enacted in August 2013 to establish the current formula for automatically updating federal student loan interest rates. Each formula adds a fixed percentage to the 10-year Treasury bill rates.
The Department of Education explains that the law also sets a cap on these interest rates, so they can never exceed a certain percentage. This ceiling is 8.25% for undergraduate students and can reach 10.50% for PLUS loans taken out by parents and graduate students.
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Section 4513 of the Act states that the Secretary of Education will suspend all payments due for student loans held by the Department of Education for three months, and that interest will not accrue for such loans for the full term. of their suspension. It also says the Secretary of Education can extend this suspension for three months at a time.
The Department of Education is part of the executive branch, which means that the Secretary of Education reports to the President. So the president — Trump in 2020, Biden now — can direct the education secretary to use the authority given to him by Congress and keep interest rates at 0% by extending the break. of payment.
But once the payment break is over, that the Biden administration says will be on December 31, 2022, federal student loan interest rates will revert to those determined by the formula set by Congress.
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Other efforts by President Biden to reduce interest on student loans have been accomplished in the same way: by working within laws passed by Congress.
Earlier this year, Biden’s Department of Education proposed a rule this would remove cases of capitalization of interest where it is not required by law – namely the Higher Education Act 1965Which one is frequently modified set the rules for federal student loans.
Capitalization of interest This is when unpaid interest is added to the principal amount of a student loan. Since interest is calculated as a percentage of principal, this increases interest payments and is one of the reasons borrowers end up owing more after years of payments. The Higher Education Act of 1965 requires it in certain situations, so Biden cannot completely eliminate it.
Likewise, the The Biden administration is trying take advantage of a provision of the Higher Education Act which gives the Secretary of Education the power to create income-driven repayment plans to reduce accrued interest for borrowers on those plans.
A new rule, announced as part of the administration’s student loan forgiveness plan, would ensure borrowers with income-driven repayment plans won’t see their balances increase as long as they make their monthly payments . This means that a borrower will not see their interest accrue even if their monthly payments are not enough to cover their monthly interest.
Jessica Thompson, vice president of the Institute for College Access & Success (TICAS), said the Department of Education would create a grant for such borrowers. This means that the Ministry of Education will pay the interest that is still running for people on these plans.
“[It’s] a very important way to limit the growth of that balance for particularly low- and middle-income borrowers whose income means their payments and IDRs don’t cover that interest,” Thompson said. “Again, these are not changes in the underlying interest.”
Any changes the Biden administration makes to the underlying interest would need to be backed by legislation passed by Congress.
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