Congress just proposed a bipartisan bill that would cap all federal student loan interest rates at 2% — and it would apply retroactively to existing loans as well.

This means that your loans would be way less costly. Normal interest rates on student loans are 6-9%. So this 2% cap could be huge.

A similar bill was introduced in 2024 with a 1% interest cap.  The 2% bill is a reintroduction of that 2024 bill. While there is bipartisan support, it has not been passed yet. So we’ll see if Congress can peanut butter the jelly (time).

Opposition may rise because cutting interest rates on student loans reduces income for the federal government, and right now government debt is a big topic. 

Regardless, interest plays a huge role in how much your student (and your other) loans will cost. So you should…

Interest rates are the way lenders make money when you borrow from them. I like to think about it as the cost of borrowing money.

Say you borrow $30,000 to pay off in 10 years. Without interest, you’d have a payment of $250 a month ($30,000/120 months). But interest makes this payment higher.

The interest rate makes the principal (the amount you borrowed) grow over time. When you make payments on your loan, you are paying down both the principal, and the interest that is accruing on your principal. This is why if you have a 6.5% interest rate, then your payment on that 10 year, $30,000 loan may look more like $345 per year.

An example I learned to show the costliness of interest rates is when shopping for a car. The higher the credit score you have, the lower the interest rate and the cheaper the car loan you can get.

If you were to get the same car and car loan at about $30,000, but with a 5% interest rate vs. a 14% interest rate, the difference in the total amount you pay would be about $7,500!

You can use this loan calculator to compare your current interest rate with the proposed one.

This will show your monthly payment, total amount you will have to pay, and your total interest. It will give you a clear idea of how a different interest rate can really change how much you pay over the course of your loan (not just student loans!). 

The limitations of this calculator are that it is pretty inflexible. So if your rate adjusts (as it might with the passing of the above policy), or you have an income based repayment plan for your loans, it becomes a little harder to figure out what your payment would change to.

I recommend you play around with the tool to see how the interest rate can really affect how much you pay. Much like Shakira’s hips, the numbers don’t lie.

Also, quick reminder that I am not sponsored by any of the tools I note here. I wish I was! These are just the tools I use.

If this bill passes, you won’t have to lift a finger to get the lower rate — but it’s still a good time to get organized. Log into studentaid.gov and:

Knowing what you owe puts you ahead of the game. Most people have no idea when they should be done paying off their loans, and how much it will cost them!

Don't let your money be a mystery. Stay informed, and take charge of your finances one step at a time ;).

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