Student Loan Interest Elimination Act Revived Amid $233 Billion Default Crisis
1 in 5 borrowers now in default as lawmakers push for 0% federal loan rates.
1Bill Specifications
Senator Peter Welch and Representative Joe Courtney's proposed legislation aims to reduce federal student loan interest rates to zero. Effective from July 1, 2026, the measure will automatically cover existing Direct Loans. Funded through a newly established Education Affordability Trust Fund, the program will be implemented without requiring borrower applications. Those with older FFEL or Perkins loans can transition to zero-interest consolidation loans.
2Debt Crisis Scale
With US federal student loan debt approaching $2 trillion, 9.5 million borrowers (1 in 5) are now in default, representing $233.3 billion in unpaid debt. The number of delinquent borrowers has nearly doubled from 5.3 million in June 2025. According to New York Fed data, defaulted borrowers saw their credit scores drop by an average of 91 points.
3Current Interest Rates
Undergraduate Direct Loan interest rates for the 2026-27 academic year are set at 6.52%. For unsubsidized graduate loans, the rate rises to 8.07%, while PLUS loans carry a 9.07% rate. The bill would eliminate these rates, making subsidized Stafford loans obsolete. Annual and aggregate borrowing limits will become inflation-indexed starting July 2027.
4Consolidation Benefits
Current consolidation practices harm borrowers in two ways: extending repayment terms and resetting forgiveness payment counters. The new law eliminates both disadvantages. Consolidators will maintain their original loan terms. Payments counted toward Public Service Loan Forgiveness will be weighted based on the consolidated loan's size and transferred accordingly.
5Funding Mechanism
The bill's most innovative aspect is its Education Affordability Trust Fund financing model. Borrower principal payments will pool in this fund, managed by trustees investing in treasury bonds. Returns will cover administrative costs, with surplus funds boosting Pell Grants and college completion programs. The system resembles the Railroad Retirement Board model.
6Impact Analysis
Zero interest won't reduce monthly payments for income-driven plans (IBR, RAP) but will stop debt growth. RAP's existing interest subsidies limit the effect for this group. For 9.5 million defaulted borrowers, the change won't halt impending collections. These borrowers will still need rehabilitation or alternative solutions to stop wage garnishments.
7Legislative Process
Introduced in March 2026 as S.4169 (Senate) and H.R.8045 (House), the bill remains in committee after four months. No hearings are scheduled in the Republican-controlled Congress. The proposal has gained support from the American Association of Colleges, EdTrust, and Hildreth Institute. Alongside Mike Thompson's 2% rate proposal, the bill is fueling election-year education reform debates.
8Sectoral Implications
Zero interest signifies a fundamental shift in higher education financing. Universities must improve cost discipline while governments develop alternative funding sources. Competition will intensify among private lenders as borrower repayment capacity improves. Long-term sustainability will require additional reforms. Affecting 43 million Americans, this initiative represents a critical step toward addressing educational inequality.