Predatory Student Loan Interest Rates & the 1% Proposal

For decades, student loan borrowers in the United States have faced interest rates that often surpass those of mortgage loans, raising critical questions about fairness and financial burden. Federal student loan interest rates, which have reached as high as 8.5%, starkly contrast with mortgage rates that have historically been lower, sometimes hovering between 3-5% for extended periods. This discrepancy is particularly alarming given that education is widely considered a public good, while homeownership—though important—is not necessarily fundamental to one’s ability to participate in the workforce.

A System Designed to Indebt, Not Empower

The argument for charging students such high interest rates has traditionally been based on risk—lenders claim that student borrowers present a greater chance of default compared to mortgage holders who can use their homes as collateral. However, this justification fails to acknowledge the reality of federal student loans: they are virtually impossible to discharge in bankruptcy, ensuring that borrowers remain trapped under their debt for decades in many cases.

Unlike mortgage borrowers, who can refinance their loans when interest rates drop, student borrowers are often locked into rates that were set arbitrarily high based on the economic climate at the time of origination. A borrower who took out loans in 2007 at an interest rate of 6.8% is still stuck paying those rates today unless they qualify for Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) forgiveness programs—both of which come with their own set of challenges and restrictions.

GOP’s 1% Proposal: Too Little, Too Late?

Recently, there has been discussion about reducing federal student loan interest rates to 1%, an idea supported by some Republican lawmakers who argue that student debt has become a national economic issue. While lowering future interest rates would be a step in the right direction, it fails to address the predatory interest rates that millions of borrowers have been locked into for decades. If fairness is truly the goal, then all outstanding federal student loans should be adjusted retroactively to reflect this lower rate. A borrower who has been paying 6% or higher on their loans for years should have their rate recalculated to match whatever new standard is set.

A fair solution would include refunding as well as applying those excessive interest payments borrowers have made beyond any newly established rate and applying the excess toward the unpaid balances of said loans OR better yet forgiving exorbitant accumulated interest in excess of the 1% being proposed. The excessive, compounding of predatory school debt interest in the United States must absolutely come to a halt.

The Uncertain Fate of Student Loans If the Department of Education Is Disbanded

Former President Donald Trump has suggested eliminating the Department of Education entirely, raising urgent questions about what would happen to federal student loans if this were to happen. The Department of Education currently oversees federal student aid programs, managing trillions of dollars in outstanding loans. Without it, the responsibility for these loans would likely be transferred to another agency, such as the Department of the Treasury, or privatized—both scenarios that could have disastrous consequences for borrowers.

If privatization were to occur, borrowers could face even more aggressive collection tactics, stricter repayment terms, and fewer options for forgiveness or income-driven repayment plans (Anyone remember Navient? Or just me?). On the other hand, if loan management were transferred to another federal agency, it could create bureaucratic chaos, leading to delays in processing payments, forgiveness applications, and even servicing transfers.

The real danger lies in the fact that, without a dedicated agency overseeing student loans, any future relief programs could become even more difficult to administer. This could mean fewer options for borrowers and a complete lack of accountability when it comes to ensuring fair repayment terms.

A Call for Systemic Change

The discussion around reducing federal student loan interest rates must go beyond a mere drop for future borrowers. The system itself has already harmed millions, and justice demands that all borrowers be included in any rate reductions. If a 1% interest rate is deemed fair today, then it was unfair to charge borrowers 6-8% in the past. True reform must include retroactive adjustments, interest refunds alongside automatic principal paydowns, and a long-term strategy that prevents future students from falling into the same debt trap.

Meanwhile, the potential disbanding of the Department of Education threatens to exacerbate an already broken system. If the federal government is serious about addressing the student loan crisis, it must commit to real solutions—ones that include rate reductions, principal adjustments, and borrower protections, rather than simply shifting responsibility from one bureaucratic entity to another.

In the end, student debt should not be a lifelong sentence. It is time to recognize the fundamental inequity of student loan interest rates, demand systemic reform, and ensure that all borrowers—past, present, and future—receive the fair treatment they deserve. A composite image created by "Newsweek" shows President Donald Trump and a concerned young woman. Photo Illustration by Newsweek/Getty Images. 

Blog inspired by Newsweek’s 02/01/2025 Article: “How Student Loans Could Change Under Donald Trump” at https://www.newsweek.com/how-student-loans-could-change-under-donald-trump-2023413

Credit extended also to Newsweek for the composite image used. Photo Illustration by Newsweek/Getty Images (same article).