Student Loan Bill Proposes 2.0% Interest Cap for Existing and New Federal Loans

The Affordable Loans for Students Act sets out to significantly lower the interest rates on federal student loans. The core proposal is to cap interest at 2.0 percent for both certain existing federal loans and new ones issued after the bill takes effect. The goal is straightforward: make student debt less burdensome.

Existing Loans: Rate Cuts and Refinancing

For current borrowers, the approach depends on who holds your loan.

• If the Department of Education directly holds your eligible federal loan, this bill mandates an automatic modification to a 2.0% interest rate, according to Section 3. No action would be needed on your part.
• If your eligible federal loan isn't held by the Department of Education (think older FFEL loans potentially held by commercial lenders but still federally backed), the bill requires the Secretary to set up a refinancing program. These loans would be consolidated into a new Federal Direct Consolidation Loan at the 2.0% interest rate. Borrowers would have the option to opt out of this refinancing.

Importantly, the refinancing itself won't automatically extend your repayment timeline; you'd keep your current schedule unless you choose a different plan. "Eligible federal loans" generally include those under specific parts of the Higher Education Act and the Public Health Service Act disbursed before a certain date.

New Loans: A 2.0% Rate from the Start

Looking ahead, Section 4 amends the Higher Education Act (specifically Section 455(b)(8)) for new federal student loans. Any Federal Direct Stafford Loans (subsidized and unsubsidized), Federal Direct PLUS Loans, and Federal Direct Consolidation Loans first disbursed on or after the first July 1st following the bill's enactment would automatically carry a 2.0% fixed interest rate.

Keeping Tabs and Potential Impact

The bill requires the Secretary of Education to report annually to Congress on how many loans are modified or refinanced and the delinquency rates on these adjusted loans (Section 3). This aims to track the program's rollout and effectiveness.

For millions of borrowers, a 2.0% interest rate could mean significantly lower monthly payments and less interest paid over the life of the loan. This could free up cash for other expenses, savings, or investments. However, implementing automatic modifications and a large-scale opt-out refinancing program across different loan servicers presents a significant administrative task.