Debate: Is Restarting Student Loan Interest Accumulation a Good Idea?

Our tax experts discuss President Biden’s plan to restart student loan interest accumulation before the repayment freeze ends.

President Joe Biden has released a new plan to assist student borrowers as the end of the student loan repayment freeze approaches. As part of the Biden administration’s “on-ramp” program, borrowers must resume repayments on their student loan debt in October.

However, borrowers unable to pay will not have those defaults reported to credit agencies for 12 months, until October 2024. While the 12-month reprieve is designed to protect student borrowers from damages to their credit ratings, interest will once again begin to accrue on student loans in September and will continue to accrue during this 12-month “on-ramp” period.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about Biden’s plan to restart student loan interest accumulation before the repayment freeze ends.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Byrnes: Restarting interest accumulation before payment obligations technically restart (and before borrowers will face consequences for failure to pay) is a part of the ramp-up to return to normalization. Student borrowers have received an unprecedented level of relief for the past three years. The pandemic is largely in the rearview mirror by this point. These student borrowers have had ample time to find employment if they lost their employment during the pandemic, so there’s no reason to continue providing this level of government assistance.

Bloink: It makes very little sense that the Biden administration would opt to restart interest accumulation while payment obligations remain frozen for another month and non-payment will largely be ignored for the next year. We’re providing relief in not reporting delinquent borrowers to credit agencies for at least another 12 months. Without corresponding relief when it comes to interest accumulation, we’re making a bad situation worse as borrowers may think they can continue to delay payment, yet will be incurring interest charges during that time.

Byrnes: When a student borrower is unable to make payments and enters forbearance, interest typically continues to accumulate on their loans. Under the COVID-era relief programs, student borrowers have paid no interest for three years on debts that they choose to incur. It’s time that we restarted interest accumulating as a reminder to student borrowers that their debt obligations continue to exist.

Bloink: The interest accumulation is one reason why many student borrowers have little hope of ever repaying their loans. We need to take steps to protect Americans who don’t have the means of restarting their student loan repayments — and that relief should include relief from accumulating interest under these debt arrangements.

Byrnes: Continuing to provide this extreme assistance to existing student borrowers only exacerbates the problems that we’re facing when it comes to student debt in America. Today’s student borrowers need to understand that if they choose to incur a debt, the government isn’t going to step in and forgive it. That’s the only way to ensure that student borrowers are responsible in taking out student loans to fund higher education.

Bloink: Republicans frame these issues as though they don’t affect every single American. Even Americans who don’t have student debt could feel the effects of restarting student loan payments via a trickle-down effect given that it’s possible that a large portion of student borrowers will be unable to meet existing financial obligations once student loan payments restart. That affects the economy as a whole — not merely delinquent student borrowers themselves.

Images: Adobe Stock