Author’s note: This preliminary chapter presents my proposed framework for student-debt reform. Congressional proposals for permanent zero interest and recent litigation over delayed Public Service Loan Forgiveness deserve separate treatment. A forthcoming update will compare those developments with this chapter’s approach: temporary upfront interest relief, less reliance on long-term income-driven repayment, and provisions to help finance the assistance. Reforming future repayment rules must also be distinguished from honoring relief borrowers have already earned under existing law.
Abstract: Federal student-loan policy has alternated between broad forgiveness proposals and increasingly restrictive repayment rules without producing a durable settlement. This chapter proposes four mutually reinforcing reforms: a temporary zero-interest period at the beginning of repayment; a predictable conventional repayment system and a private-market off-ramp for seasoned loans; correction of the marriage penalties, bracket design, and inflation problems embedded in the Repayment Assistance Plan; and a zero-interest Treasury resolution account for debt that persists after twenty years.
The framework concentrates assistance when borrowers are most financially constrained and when every subsidy dollar can accelerate principal reduction. It preserves income-driven repayment as a genuine safety net, corrects several structural defects in RAP, and replaces automatic late-life discharge with a simpler structure in which larger remaining balances generally still require larger repayments. The objective is neither indiscriminate cancellation nor decades of punitive collection. It is to make student debt a temporary obligation while protecting taxpayers from open-ended subsidies.
Introduction
The political debate over student debt has become trapped between two unsatisfactory approaches. Progressive proposals have often relied on broad loan forgiveness that is poorly targeted, fiscally expensive, and vulnerable to legal challenge. Many borrowers need relief, but not every borrower requires large-scale cancellation, and the budgetary resources devoted to blanket forgiveness are also needed for other national priorities.
Republicans have moved sharply in the opposite direction. The student-loan system enacted in the 2025 tax legislation replaced the SAVE plan with a more restrictive Repayment Assistance Plan, or RAP. For new loans beginning July 1, 2026, borrowers generally must choose between RAP and a Tiered Standard plan. RAP prevents negative amortization for borrowers who make required payments, but it can require repayment for as long as thirty years, applies its percentage schedule to total adjusted gross income rather than marginal income, and does not index its income thresholds to inflation.
Both parties have also become overly reliant on income-driven repayment as the principal mechanism for managing student debt. Income-driven plans are necessary for borrowers whose payments would otherwise be unaffordable, but they are administratively complex and can transform a temporary educational obligation into a claim on earnings that lasts for much of a worker’s career. A system built around thirty years of repayment should not be treated as the normal path for millions of borrowers.
The repayment transition is a particularly vulnerable period. No current national statistic isolates every borrower’s first twenty-four months under today’s rules, but historical cohort evidence found that approximately 7.5 percent of borrowers leaving school in 2004 defaulted within two years. Current Federal Student Aid data provide a broader warning: as of December 2025, 23.2 percent of recipients with loans in active repayment—more than four million people—were more than thirty days delinquent. These measures are not directly comparable, but together they show why policy should focus on the beginning of repayment rather than wait until financial problems have compounded.
The central objective of reform should instead be to help borrowers eliminate principal early enough to save for retirement, purchase homes, form families, and build long-term financial security. This objective is especially important for younger workers who may face reductions in future Social Security benefits and therefore may need to accumulate more private savings than earlier generations.
Student-debt reform must nevertheless balance the interests of borrowers and taxpayers. Borrowers need a fair and predictable system that prevents interest from overwhelming principal and provides protection when income is genuinely inadequate. Taxpayers deserve assurance that federal assistance is targeted, that borrowers retain strong incentives to repay, and that the government does not carry performing loans on its balance sheet for several decades without a compelling reason.
The key design principle is straightforward: public support should be concentrated near the beginning of repayment, when borrowers are generally most financially constrained and assistance can do the most to accelerate principal reduction. Support should then diminish as earning capacity and credit quality improve, while a reformed income-driven program remains available as a safety net for borrowers who continue to face hardship.
The Path Forward
The proposed framework consists of four mutually reinforcing reforms:
Provide twenty-four months of zero interest at the beginning of repayment, with authority to extend the period to thirty-six months if budget scoring and offsets permit.
Create a stable conventional repayment structure and a private-market off-ramp, including a fixed federal interest rate and a principal-reduction incentive for seasoned borrowers who refinance responsibly.
Correct RAP’s structural defects, including its marriage penalties, whole-income brackets, failure to index thresholds, and inadequate information about interest, principal reduction, and alternative repayment options.
Replace unresolved late-life debt with a zero-interest Treasury resolution account after twenty years, rather than relying on a thirty-year discharge system that is difficult to administer and controversial to finance.
The current system suffers from four broad structural problems. First, assistance is often delivered too late. Borrowers receive the greatest benefit from income-driven repayment only after financial difficulties have persisted, while interest and missed-payment consequences can accumulate during the years when earnings are low and household-formation costs are high.
Second, the federal system provides too little encouragement for borrowers with improving finances to leave long-term government repayment programs. Performing loans may remain on the federal balance sheet for decades even when borrowers have established stable employment and could qualify for conventional private credit.
Third, RAP contains design flaws that are unrelated to a borrower’s underlying capacity to repay. Its treatment of married households can impose substantial penalties, its percentage schedule creates abrupt payment jumps because each rate applies to all income, and the failure to index thresholds means inflation will steadily increase payments even when real purchasing power has not improved.
Fourth, the system lacks a coherent endpoint for borrowers who still owe money after twenty years. Older borrowers can remain trapped in a complicated Education Department repayment structure, fail to receive relief because of documentation or payment-history gaps, or approach retirement with a balance that has little realistic prospect of being repaid under conventional terms.
Each reform could be enacted independently. Their greatest value, however, comes from operating together: early interest relief accelerates principal reduction; a refinancing incentive creates an off-ramp for borrowers whose finances improve; RAP reform preserves a fair safety net; and a Treasury-based resolution process prevents unresolved debt from continuing indefinitely.
REFORM ONE: Concentrate Federal Assistance During the First Two Years of Repayment
All new federal student loans should carry a zero percent interest rate during the first twenty-four months in which payment is required. Congress could authorize a thirty-six-month period if formal scoring shows that the additional year is affordable, but two years is a reasonable starting point. It covers the highest-risk transition from school to work while limiting the cost and avoiding a permanent promise of subsidized credit.
Borrowers currently enrolled in an income-driven plan should also be allowed to elect a one-time twenty-four-month zero-interest period if they convert to a conventional amortizing schedule. The option would encourage borrowers whose finances have stabilized to begin reducing principal instead of remaining in a long-term income-driven program solely because accumulated interest makes conversion unattractive.
The first several years after graduation are often the period when borrowers are least able to absorb interest costs. Earnings are lower, housing expenses are high, and many borrowers are establishing households, beginning families, or completing professional training. Eliminating interest during this period means that every scheduled dollar reduces principal directly.
An illustration shows the scale of the benefit. A borrower with a $35,000 balance at 6.5 percent would owe approximately $397 per month on a ten-year conventional schedule. If that borrower continues making the same payment but receives zero interest for the first twenty-four months, the loan would be repaid approximately seventeen months earlier and lifetime interest would fall by about $6,795. A thirty-six-month zero-interest period would shorten repayment by about twenty-two months and reduce interest by roughly $9,007. These are illustrations, not federal budget estimates, but they demonstrate why front-loaded assistance can produce a much larger long-run effect than an equivalent subsidy delivered near the end of repayment.
Conventional repayment should be the presumptive route during the introductory period, but RAP must remain immediately available to borrowers facing genuine hardship. A rigid rule requiring every borrower to make two years of conventional payments before entering RAP would manufacture defaults among people the safety net is meant to protect. Borrowers who are unemployed, disabled, caring for a seriously ill family member, serving in qualifying public or military positions, or earning below a carefully defined minimum should be allowed to enter RAP without forfeiting future benefits.
Congress should finance part of the zero-interest period by repealing or phasing out the federal deduction for student-loan interest.
The student-loan-interest deduction is also poorly designed as debt-reduction policy. It provides a relatively small annual tax benefit only after a borrower has paid interest, and its value generally rises with the borrower’s marginal tax rate. Borrowers with low incomes, limited tax liability, or payments that do not generate a usable deduction receive comparatively little assistance. More fundamentally, the deduction reduces the after-tax cost of carrying debt but does not directly encourage borrowers to eliminate principal more quickly. Redirecting the same federal resources toward an introductory zero-interest period would provide assistance earlier, help borrowers with weaker initial earnings, and ensure that scheduled payments reduce the amount owed.
The elimination of the student-loan-interest deduction would provide a meaningful fiscal offset. The Joint Committee on Taxation estimates that the deduction will reduce federal receipts by approximately $2.5 billion to $2.7 billion per year from 2025 through 2029, or $12.9 billion over five years. The proposal’s net fiscal cost should be calculated by subtracting the full current-law revenue loss from the student-loan-interest deduction over the budget window from the federal interest revenue forgone during the two-year zero-interest period. Because repeal of the deduction would generate savings throughout the budget window, while the zero-interest benefit would apply only during the first two years of each qualifying loan, the deduction’s elimination could finance a substantial share of the proposal. A formal budget score would be required to determine the precise net effect.
Borrowers with existing loans could be grandfathered under current law, or the deduction could be phased out over several years. Either approach would avoid abrupt retroactive changes while redirecting federal resources from a back-end tax preference toward front-end principal reduction.
The temporary zero-interest period is intentionally limited. It does not promise indefinite subsidized credit or broad cancellation. It provides concentrated assistance when it is most likely to prevent delinquency, reduce principal, and shorten the period during which a borrower remains indebted.
REFORM TWO: Create a Predictable Conventional Repayment System and a Private-Market Off-Ramp
Federal student loans should carry a stable fixed interest rate rather than changing automatically with a single annual Treasury-market observation. A rate of approximately 4.5 percent for all new cohorts provides a useful starting point for legislative analysis, although a final rate between 4.0 and 5.0 percent could be considered after accounting for federal borrowing costs, administrative expenses, expected defaults, and the value of statutory borrower protections.
The federal government is better able than individual borrowers to absorb interest-rate risk. Tying each cohort’s rate to one market window creates unnecessary volatility and can substantially increase borrowing costs for students who happen to enter school during a period of elevated Treasury yields. A stable rate would make future payments easier to understand and compare before a student borrows.
A fixed federal rate should be combined with a one-time incentive for borrowers to refinance seasoned loans into the private market. Borrowers with RAP loans or conventional Direct Loans should be eligible for a principal reduction equal to five percent of their outstanding federal balance if they refinance into a qualifying private student loan after making at least sixty months of on-time payments.
Five years of successful repayment demonstrates a sustained commitment to meeting the obligation and gives many borrowers time to improve their credit profiles and establish stable earnings. The waiting period also prevents the government from subsidizing immediate refinancing by borrowers who would have left the federal system without an incentive.
The principal reduction should be applied directly to the federal balance immediately before refinancing. From the borrower’s perspective, the reduction creates a tangible reward for establishing a strong repayment history and can compensate for part of the cost of moving to conventional private credit. From the taxpayer’s perspective, it transfers a seasoned performing loan off the federal balance sheet and reduces exposure to decades of subsidized repayment and possible discharge.
Private refinancing is not appropriate for every borrower. A borrower who refinances generally gives up access to federal income-driven repayment, statutory deferment and forbearance rules, and other protections. The program should therefore require standardized disclosure of the protections being surrendered, a clear comparison of projected payments, and a waiting period during which the borrower may cancel the transaction.
Qualifying private loans should also meet minimum consumer-protection standards. Congress should consider limits on variable-rate structures, prepayment penalties, capitalization practices, servicing fees, and the treatment of death or permanent disability. The federal incentive should not be used to move borrowers from a complicated public program into a private product that recreates the same long-term risks.
This reform treats federal assistance as a targeted off-ramp rather than an open-ended promise of eventual forgiveness. Borrowers whose finances improve receive a clear path toward ordinary amortizing debt, while borrowers who still require income-based protection remain in the reformed federal safety net described below.
Implementation Issue: Physicians and Other Long-Training Professionals
The treatment of physicians and other professionals belongs here rather than in the discussion of RAP’s general bracket design. Their problem arises from the interaction of professional-school borrowing limits, several years of low-paid postgraduate training, and the timing of the conventional-repayment transition.
For new loans beginning July 1, 2026, federal professional-student loans are capped at $50,000 annually and $200,000 in the aggregate, Grad PLUS is phased out, and a broader lifetime federal loan limit applies. Those restrictions may reduce excessive borrowing, but they can also create pressure for medical, dental, veterinary, and other long-training students whose earnings remain modest during residency or supervised training.
A two-year introductory zero-interest period will not cover every residency or fellowship. Congress should therefore permit a narrowly defined training extension: borrowers in accredited, required postgraduate training could receive up to three additional years of zero interest or reduced conventional payments, with immediate access to RAP when the standard payment is demonstrably unaffordable. The extension should end when qualifying training ends and should not become a broad subsidy for every high-balance graduate borrower.
This targeted accommodation is more coherent than distorting RAP for all borrowers. It recognizes the unusual income path of long-training professions while preserving the paper’s general principle that federal assistance should be front-loaded and tied to a temporary transition rather than provided through decades of open-ended repayment.
REFORM THREE: Correct the Structural Defects in the Repayment Assistance Plan
RAP should be retained as a safety net, but its payment schedule must be redesigned to treat similarly situated borrowers more fairly and to ensure that an income-driven plan actually provides affordable repayment.
Under the final rules, RAP requires a minimum annual payment of $120 for borrowers with adjusted gross income of $10,000 or less. Above that level, the applicable percentage rises by one percentage point for each $10,000 income band—from 1 percent for income above $10,000 through $20,000 to 10 percent for income above $100,000. The percentage applies to the borrower’s entire adjusted gross income, not merely to income within the higher band. Borrowers generally must make 360 qualifying monthly payments before the remaining balance is discharged.
That whole-income design creates abrupt payment jumps. A small increase in earnings can cause a higher percentage to apply to every dollar of income, producing an implicit marginal repayment rate far above the stated schedule. The same design intensifies marriage penalties when joint income pushes a household into a higher band.
RAP’s spousal proration rule prevents the most obvious double counting when both spouses have federal loans, but it does not eliminate the marriage penalty. When only one spouse has debt and the couple files jointly, the debt-free spouse’s income can still increase the borrower’s required payment even though no additional educational debt entered the household. Filing separately may reduce the RAP payment, but it can increase income taxes and can interfere with other benefits tied to joint filing.
The paper therefore recommends four changes.
First, apply RAP percentages marginally. The higher rate should apply only to income within the higher band. This would prevent a small raise from causing a disproportionate increase in the entire annual payment and would reduce implicit marginal tax rates on work, promotion, and retirement contributions. My earlier analysis of RAP marriage penalties showed that marginal brackets and wider married thresholds can substantially reduce the liquidity shock without eliminating repayment responsibility.
Second, create genuinely marriage-neutral thresholds. Married brackets should be wider than single brackets, and the calculation should distinguish between households in which one spouse has debt and households in which both spouses have debt. When only one spouse borrowed, Congress should allow either a separate-income calculation or an allocation formula that does not treat all of the debt-free spouse’s earnings as repayment capacity for the borrower’s loan.
Third, index every RAP parameter to inflation. Income bands, the minimum payment, dependent allowances, and any protected-income amount should be adjusted automatically. Without indexing, nominal wage growth pushes borrowers into higher payment ranges even when real purchasing power is unchanged. In an illustrative case involving a $35,000 balance, $62,000 of starting income, and 2.5 percent annual inflation, the RAP payment rose approximately 49 percent over ten years, compared with about 28 percent for a conventional fixed-payment loan. The purpose of IDR is to adjust payments to real capacity, not to convert inflation into an unlegislated benefit cut.
Fourth, preserve visible principal reduction. Payments that exceed accrued interest should reduce principal immediately, and borrowers should receive a single annual statement showing interest charged, interest waived, principal paid by the borrower, any federal principal contribution, and the projected payoff date under both RAP and the conventional alternative. A safety-net program is more credible when borrowers can see whether their balances are declining and what actions would shorten repayment.
These reforms are not an argument for restoring every feature of SAVE. SAVE could provide very large subsidies and unusually rapid discharge for some low-balance borrowers. But the opposite extreme is not acceptable either. In one earlier illustration, a borrower with $12,000 of debt and $40,000 of starting income would repay approximately $26,121 under RAP over more than twenty-four years, compared with much lower payments and a shorter discharge period under SAVE. That comparison does not prove that SAVE was fiscally sustainable; it demonstrates that RAP can impose a repayment horizon out of proportion to a relatively modest original balance.
A reformed RAP should remain less generous than broad forgiveness while still serving its stated purpose. Marginal brackets, marriage neutrality, inflation indexing, and transparent principal accounting would preserve repayment incentives without turning the safety net into a penalty for earning more, marrying, or experiencing ordinary inflation.
REFORM FOUR: Establish a Zero-Interest Resolution for Debt That Persists into Later Life
The number of older Americans carrying student debt is no longer marginal. The Consumer Financial Protection Bureau reported that the number of borrowers age sixty-two and older increased from 1.7 million in 2017 to 2.7 million in 2023, a 59 percent increase. It also estimated that 452,000 borrowers age sixty-two and older had defaulted loans and were likely receiving Social Security, while nearly 90,000 borrowers age eighty-one and older held an average federal balance of approximately $29,000.
Forced collection has also expanded dramatically. Between 2001 and 2019, the number of Social Security beneficiaries experiencing an offset for student debt increased from about 6,200 to 192,300. The CFPB found that much of the money collected was applied to interest and fees rather than principal, and that older borrowers often failed to obtain hardship relief because the process required documentation they could not successfully provide.
The 2025 repayment reforms may increase the future number of borrowers carrying debt into later life, but the magnitude cannot yet be observed because RAP only began in July 2026. The risk arises from the combination of a thirty-year qualifying-payment requirement, fewer traditional deferment options for newer loans, and unindexed payment bands that can create payment interruptions or force borrowers to remain in repayment longer. This is a projection based on program design, not a measured post-reform outcome.
The current discharge model is unsatisfactory for both borrowers and taxpayers. A borrower can make payments for years yet fail to receive a discharge because months were not properly documented or did not qualify. Conversely, automatic discharge can appear arbitrary because two borrowers with different original balances may ultimately repay similar amounts, or a borrower who took on more debt may receive a larger cancellation. Those outcomes make the system difficult to defend politically and can weaken incentives to limit borrowing.
After twenty years of repayment, any remaining federal balance should therefore be transferred into a standardized zero-interest Treasury resolution account. The transfer would end further interest accrual and replace a complicated Education Department repayment relationship with a simple federal collection mechanism. It would not constitute automatic forgiveness.
The payment formula should protect a reasonable floor of earnings and retirement income. Social Security benefits below a specified threshold should not be offset, and borrowers should not be forced to liquidate qualified retirement accounts or essential home equity. At the same time, borrowers with substantial income or liquid assets should continue making meaningful payments.
A zero-interest endpoint is preferable to continued capitalization or a new low-interest loan for three reasons. First, it prevents a late-life balance from growing after the borrower has already spent two decades in repayment. Second, it eliminates much of the need for repeated hardship documentation and interest-waiver calculations. Third, it preserves a basic relationship between borrowing and repayment: a borrower who owes more at the twenty-year point generally remains responsible for more principal, while a borrower who has paid down the balance owes less.
This structure is also more defensible than broad discharge. Discharge is expensive and controversial because it can erase large balances without a clear relationship to the amount borrowed or repaid. A zero-interest resolution account gives the borrower genuine relief—the debt can no longer compound—while preserving the taxpayer’s claim to remaining principal. Existing categorical discharges for death, total and permanent disability, school closure, fraud, or other extraordinary circumstances should remain available.
The resolution account may improve federal recoveries compared with a thirty-year discharge, but it should not be advertised as guaranteed budget savings. Eliminating future discharge reduces one federal cost, while eliminating interest reduces another source of receipts. The relevant measure is the present value of net collections after administrative expenses, defaults, and hardship protections—not the nominal face value of balances transferred.
Congress should decide whether the account is administered by a specialized Treasury office or through a jointly administered Education–Treasury unit. The IRS already operates installment agreements, but student-loan repayment should remain distinct from tax examination and ordinary tax enforcement. Borrowers should receive one statement and one payment channel, not a new layer of overlapping bureaucracy.
Chapter 13 bankruptcy treatment should be coordinated with the twenty-year endpoint. A Chapter 13 plan should allocate a meaningful share of disposable income to federal student-loan principal rather than allowing the balance to grow while other unsecured creditors receive most available payments. Courts should retain authority to consider disability, age, dependents, medical costs, school fraud, and other circumstances that make repayment unrealistic. Payments made through a confirmed plan should count toward the twenty-year transfer date.
A coherent resolution process would be better for borrowers who cannot navigate today’s discharge and documentation rules and better for taxpayers who would otherwise face default, costly collection, or eventual cancellation. Its defining compromise is simple: no more interest after twenty years, but no automatic erasure of principal solely because the calendar has run.
Conclusion
The student-debt debate has become polarized between expansive forgiveness proposals and increasingly burdensome repayment systems. Both approaches rely too heavily on income-driven repayment and allow debt resolution to extend far into borrowers’ working lives.
A third-party tax reconciliation approach offers a more practical alternative. A temporary zero-interest period would concentrate assistance when borrowers are most financially constrained and when every payment can reduce principal. A stable federal rate and a carefully designed refinancing incentive would create a path into conventional private repayment for borrowers whose finances improve. Marriage-neutral, inflation-indexed, marginal RAP rules, together with transparent principal accounting and clear opportunities to compare repayment plans, would preserve income-driven repayment as a genuine safety net. A zero-interest Treasury resolution account would provide a manageable endpoint for long-term borrowers without automatically canceling principal.
The proposal rejects both indiscriminate cancellation and excessively punitive repayment. It does not assume that every borrower can repay on the same schedule, but it also does not treat thirty years of income-based payments as a satisfactory norm. Relief should be targeted, transparent, and designed to accelerate the elimination of principal while preserving a meaningful repayment obligation for borrowers who have the ability to pay.
Most of the central reforms have a direct connection to federal spending, revenues, loan-subsidy costs, interest receipts, or collections and therefore could plausibly be considered in a budget-reconciliation bill. These include the introductory zero-interest period, repeal of the student-loan-interest deduction, changes to federal interest rates, the refinancing incentive, revisions to RAP payments, and the creation of a long-term Treasury resolution system. Some related provisions—particularly broad consumer-protection requirements or changes to bankruptcy law—could face closer scrutiny if their budgetary effects are judged incidental. Those provisions may need to be narrowed, tied more directly to federal recoveries, or enacted through separate legislation.