Congress Considers Ending In-School Student Loan Interest Pause
Credit: Tom Williams / CQ-Roll Call, Inc / Getty Images- Currently, interest on subsidized student loans doesn’t accrue while a student is enrolled in college.
- Republicans in the U.S. House of Representatives are considering a change to this policy.
- If approved, it could cost students nearly $3,000 over the course of a bachelor’s program.
- It would also potentially make the federal government more money.
Republican lawmakers in the U.S. House of Representatives may end the in-school student loan interest subsidy, potentially adding thousands of dollars in debt for low-income college students.
In a memo circulating on Capital Hill that was first reported by Politico, Republicans outlined potential program cuts for the next federal budget. Included in that memo was a potential plan to end in-school interest subsidies, which refers to the government paying off interest that accumulates on subsidized federal student loans while a borrower is still enrolled in school full or part time.
If it were to be enacted, interest would begin accruing on all loans as soon as they are disbursed, instead of when the student graduates or unenrolls.
Subsidized loans apply only to those who demonstrate “financial need,” often low-income students eligible for Pell Grants.
Such a move would add hundreds, if not thousands, of dollars to students’ loan balance before they finish their studies.
The federal government would presumably profit more from the federal student loan program. However, the congressional memo does not estimate how much money the government might collect through such a move.
Student and borrower advocates warned against this potential revision.
“Changing this would only result in more loan delinquency and defaults,” Carolina Rodriguez, director of the Education Debt Consumer Assistance Program, told BestColleges.
Calculating the Monetary Impact
Let’s walk through an example to understand the potential impact of this change.
Currently, a first-year undergraduate student can receive a maximum of $3,500 in subsidized federal student loans during their first academic year. This cap applies to both dependent and independent students.
Meanwhile, the fixed interest rate for undergraduate loans is 6.53%, according to Federal Student Aid.
Under the current rules, if a student received the maximum loan amount in their first year, that $3,500 subsidized loan balance would remain unchanged until six months after they exit school.
However, if interest begins accruing immediately, the first-year loan would accumulate $0.64 in interest each day. That adds up to nearly $229 annually and $914 over the course of a four-year bachelor’s program.
Students who also receive subsidized loans during their second, third, and fourth academic years would see interest accumulate on those loans, too. Those interest rates may be higher in future years. Additionally, students are eligible for larger loan awards in subsequent years, meaning interests will balloon further.
A student who receives the maximum subsidized loan amount for four years at a fixed interest rate of 6.53% would see their loan balance grow by $2,873 by the time they graduate.
Additionally, unpaid interest is added to the principal balance of a loan when a borrower exits deferment, Betsy Mayotte, president of the Institute of Student Loan Advisors, told BestColleges. All enrolled students are automatically placed in in-school deferment, which means the $2,873 in accumulated interest will be added to the principal balance of the loan after graduation if Congress approves this policy change.
This leads to larger monthly loan payments after graduation.
Downstream Effects of This Policy Change
Rodriguez said ending the in-school interest subsidy would reinforce the idea that a college education does not offer a strong return on investment (ROI).
She explained that the more debt is added, the longer it’ll take for many borrowers to pay off their loans. That difference in time to get out from under debt may leave borrowers regretting ever enrolling in college.
“The consequences are very tangible and real,” she said.
Mayotte added that this proposal would harm the most financially vulnerable students, as these are the ones who qualify for subsidized loans to begin with. Most middle- and high-income students would be unaffected.
“While I appreciate the desire to save money for the American people as a whole, this targets the very people that they would arguably want to help the most with those savings,” Mayotte said. “You would be adding a significant financial burden to these families.”
According to federal data, approximately 4.1 million borrowers received a subsidized loan in 2022-23, compared to 5.6 million who received an unsubsidized loan.
Additionally, Rodriguez said she foresees more student loan defaults if the in-school subsidy is revoked.
“The moment people feel like they need to prioritize their spending, student loans come last,” she said. “It’s going to be housing and food first.”
As people prioritize other expenses over student loans, they would default on those loans. The government may then garnish a borrower’s wages, Rodriguez said, driving more borrowers into poverty.