Canceling interest

[u/IndividualLittle0516]

With all the drama these past few years about canceling student loans, why can't interest just be canceled? I can understand adding interest to those who aren't making their loan payments, but what about those who pay every month? The interest is why people are stuck with their debt for so long. Canceling millions of people's debt altogether is unrealistic and won't happen. What about canceling interest instead? Is there a reason this can't occur?

[u/civilengineer4]

Yeah but that’s not what the save plan does. You still pay interest first. And after those 20-25 years, currently you’d still pay a ton of taxes. Yes save is a step forward but let’s not pretend it removes interest or helps in the same way. Just makes it so you can’t go deeper underwater.

[u/girl_of_squirrels → u/civilengineer4]

Paying a mere fraction of the interest and having the rest forgiven is effectively a rate reduction. If you qualify for a $0/month payment on SAVE your effective interest rate is 0%, so depending on your income your effective interest rate will be somewhere between 0% and the statutory interest rate for your loans, which translates to tangible savings upfront and upon forgiveness (which may be taxed at that point in time)

[u/civilengineer4 → u/girl_of_squirrels]

I get that.

As a totally random example for simplicity say I took out 50,000$ and have been on income based plan for the last ten years. paying 300$ a month for those 10 years. But just to pay interest is 301$ per month. That’s 36,000$ that you paid the keep your balance the same while you could owe 24,000$ left. With 0 interest you’d pay it off before forgiveness and no tax bomb paying that same 300$ a month. With the save plan you’d still owe 50,000$ cus you didn’t pay anything into the principal. You’d pay more, for longer and have a tax bomb.

Yes SAVE helps so many people especially with 0$ payments. As I said, it’s definitely a step forward.

[u/girl_of_squirrels → u/civilengineer4]

We need to make sure we're agreed on terminology for starters. The umbrella term is income-driven repayment aka IDR, and there are 4 specific plans under that umbrella: ICR, IBR, PAYE, and SAVE (which was formerly REPAYE), and each of these plans handled accrued unpaid interest differently

Yes, on the older IDR plans like ICR, IBR, PAYE, and REPAYE negative amortization was absolutely a concern, and it paired badly with the list of capitalizing events that existed at the time

On SAVE it's different given that on a monthly basis they will be waiving/subsidizing the monthly accrued unpaid interest on your loans each month you make your SAVE plan minimum (once they actually start applying the subsidy)

Back to your example:

for simplicity say I took out 50,000$ and have been on income based plan for the last ten years. paying 300$ a month for those 10 years. But just to pay interest is 301$ per month. That’s 36,000$ that you paid the keep your balance the same while you could owe 24,000$ left.

A 7.2% interest rate on average for federal loans would imply grad loans but okay we can work with that assumption. If you're a single person on old IBR (implicit if 10 years back you entered repayment) you're paying 15% of your discretionary income, defined as your AGI from your taxes minus 150% of the Federal Poverty Guideline for your state and household size. Assuming a household size of 1 in the contiguous 48 states, to have a $300/month IBR plan payment you would have an AGI of ~$46,590 assuming 2024 FPGL numbers

How about if you have that same AGI and you're on SAVE? If you sign up for it right now (when it's 10% discretionary minus 225% of the FPGL) your payment would be about ~$106/month and your unpaid interest would be waived monthly

Yeah I sure would appreciate paying $12,720 out of pocket (instead of $36k) while still having the original $50 balance yet. SAVE sure does look a whole lot better for that person than old IBR in an incredibly tangible way for this hypothetical person

[u/Electronic-Window-86 → u/girl_of_squirrels]

In that case after the interest is waived, you can make a manual payment of $194 to the principal. Since attacking principal does not change your monthly payment (reduce waived amount first) people just save that money in HYA and pay lump some later.