Legislation introduced in Congress would allow millions of federal student loan borrowers to refinance their existing loans into new loans with a 0% interest rate, a proposal aimed at reducing borrowing costs while restructuring how the federal government finances its student loan program, WMTW reports.
The measure would apply only to federally held student loans and would not affect private student loans. If enacted, borrowers would continue repaying the principal on their loans, but interest charges would be eliminated through the refinancing program outlined in the legislation.
The proposal comes as millions of Americans continue to carry federal student loan debt, fueling ongoing debate in Washington over ways to make higher education more affordable and reduce long-term borrowing costs.
According to the bill, the U.S. Department of Education would establish a new trust fund to replace revenue currently generated through student loan interest payments. Borrowers’ principal payments would be deposited into the fund, and the federal government would invest those dollars in U.S. Treasury securities and municipal bonds. Earnings from those investments would be used to fund the federal student loan program.
The legislation does not explain how the program would remain financially sustainable if investment returns fall short of generating enough revenue to support the trust fund.
Under the proposal, any investment earnings exceeding the amount needed to operate the program would be directed toward higher education initiatives. The bill calls for using excess revenue to expand Pell Grant funding and create competitive grant programs that support college completion and student retention.
The legislation also seeks to limit tuition growth. Colleges and universities would be eligible to access funding tied to the trust fund only if they keep annual tuition increases at or below 2%.
Future federal student loan borrowers would not automatically qualify for 0% interest rates. Instead, the proposal establishes a tiered system in which interest rates would range from 0% to 4%, depending on a borrower’s financial need.
The measure remains under consideration in Congress and must pass both the House and Senate before it can be sent to the president for signature.
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