A new report from a Boston-based research center has found nearly a quarter of all student loan payments made in 2019 were interest and calls for an interest-free loan structure to be put in place to cope. to the university debt crisis.
The Hildreth Institute report said that if the federal government were to implement this program change, it would bring economic relief to current and future borrowers, who are often saddled with so much interest they cannot make substantial progress in reimbursing their principal student. loan balances.
The report says interest payments make up a bigger share of student loan payments than ever, rising from $13.1 billion in 2015 to $22.4 billion in 2019.
“Under the current system, many student borrowers are seeing their outstanding balances increase even as they make their monthly payments,” said report author Bahah Akman Imboden, chief executive of the Hildreth Institute. “Low-income students and students of color are disproportionately affected by this.”
Akman Imboden said that 20 years after repayment began, the median black borrower still owes 95% of the amount borrowed, compared to the median white borrower who has already repaid the majority of their loan.
The concept of negative amortization, according to the report, refers to interest accruing faster than borrowers are able to repay their loans. Interest accrued is added to the principal amount, compounding interest and increasing future monthly repayment obligations.
The report notes that this struggle leads borrowers to seek income-based repayment plans, which offer lower monthly payments but often lead to a much larger loan amount that must be repaid due to accumulating interest. during the debt extension.
While the report acknowledges Biden administration plans slated to take effect in July 2023, which would limit how interest can choke debt or eliminate debt in the event of fraud, school closures or disability, he calls on federal leaders to do more — by eliminating the interest requirement on student loans entirely.
This would allow borrowers to pay off their debts more quickly by making monthly payments directly against the principal balance. To offset the cost of this operation, the report suggests that the federal government could invest principal repayments in a risk-free asset, which “would generate a return to cover administrative costs and issue new loans.”
The report estimates that for the average student on an IBR plan with $35,000 in student loans, eliminating interest would reduce their monthly payment from $327 to $145, potentially saving them $18,500 over time. of his loan.
“Waiving interest won’t end the student loan crisis, but it’s a way to make things easier and cheaper for students,” said Bob Hildreth, founder of the Hildreth Institute.