The Affordable Loans for Students Act (the Act) was introduced in Congress on March 10 as an amendment to the Higher Education Act (HEA) of 1965 for the purpose of lowering Federal student loan interest rates to 2%. The rate reduction will apply to all borrowers, including those now in repayment, by automatically refinancing all student loans unless the borrower chooses not to do so. As a bipartisan bill, it’s designed to relieve the burden of student debt, a long-standing concern of both Houses of Congress.
The proposed 2% interest rate cap is a significant reduction from current loan rates of 6.39% for Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduates, 7.94% for Direct Unsubsidized Loans for graduate/professional students, and 8.94% for Direct PLUS Loans for parents and graduate/professional students. Under Education Department(ED) rules, when a loan is assigned an interest rate it is fixed for the loan’s life.
The effective date of the changes in student loan programs in the recently passed Budget Reconciliation Law of 2025 (theLaw) is July 1, 2026. As of this August, it’s not clear how the Act would interact with and be affected by the Law. The Law modifies borrowing limits and repayment options for student loan programs. It also imposes yearly and lifetime caps on amounts borrowed by students and parents and modifies the rules for loan deferments.
Key Provisions of the Act:
- Interest Rate Cap: The Act will cap the interest rate on Federal student loans, including undergraduate, graduate, and PLUS loans, at 2%.
- Retroactive Application: The 2% interest rate will apply to new loans and to the unpaid balances of all Federal student loans outstanding.
- Automatic Refinancing: The ED will be authorized to automatically modify and refinance Federal student loans to reflect the 2% interest rate, eliminating the need for borrowers to apply for this benefit.
- Refinancing for Older Loans: Borrowers with older Federal loans not made by the ED will have the option of consolidating them into Federal Direct Loans in order to be able to obtain the 2% interest rate.
Benefits:
- Reduced Debt Burden: The most significant impact of the bill will be the reduction in the overall cost of a student loan. This will enable borrowers to pay far less for a loan than they would under current programs.
- Increased Affordability: Lower monthly payments would free up income for borrowers, allowing them to better manage their finances and improve their economic well-being.
- Improved Access to Higher Education: By making loans more affordable, the Act will encourage more students to pursue a college education by reducing the financial barriers that currently deter many of them.
Supporting Organizations:
The Act has the support of student-advocate associations such as the National Association of Student Financial Aid Administrators (NASFAA), the American Council on Education (ACE), and the American Association of Colleges and Universities (AACU).
Karen McCarthy, NASFAA’s vice president of government relations, stated that NASFAA has long advocated for the reinvention of student loan programs to make them simpler and fairer. “By lowering the interest rate on all Federal student loans to 2%, the Affordable Loans for Students Act puts forth an equitable approach that would help ease the burden of student loan debt on current and future borrowers. This legislation is an important step in promoting access to affordable postsecondary education.”
Status of the Act:
The Act will impose the following major costs on the Federal government, mainly due to its 2% interest rate cap:
- Forgone Interest Income:The government earns revenue from the interest paid on student loans. Capping the rate at 2% will reduce interest payments, resulting in a significant loss of revenue for the United States.
- Government Borrowing and the Treasury Rate: Federal student loan interest rates are indexed to the 10-year Treasury note plus a fixed percentage surcharge based on the type of loan. The 2% rate cap will be a sizable reduction from the current rate. The 10-year Treasury note closed at 4.36% on July 30, 2025, so the loss would be significant even before a loan-specific surcharge is added.
- Need for Offset:This forgone revenue would need to be offset by means of increased taxes, cuts to other programs, or additional government borrowing.
The Congressional Budget Office (CBO) has estimated the costs of other student loan interest proposals, but a specific estimate for the Act isn’t yet available. A CBO analysis in 2018 estimated that uncapping the interest rate by 2% would have increased Federal revenue by $16 billion from 2019 to 2028. Capping rates at 2% would have the opposite effect. It would decrease revenue because the government would receive far less in interest payments from indebted students over time. While the cost has not yet been estimated by the CBO, it’s apparent that Federal action would be needed to compensate for the revenue decline resulting from the Act.
The impact of the legislation is sizable, so the Act’s future in Congress is uncertain. The Act remains in committee in the House and has not yet been considered by the Senate. Its future depends largely on legislative momentum in the House Education and Workforce Committee.
Table A, below, is a summary of key aspects of Act:
Table A
Summary
| Feature | Affordable Loans for Students Act |
| Interest rate cap | 2% on all Federal student loans |
| Applies to existing loans | Yes—retroactively |
| Refinancing mechanism | Automatic, with opt-out |
| Cosponsors | U.S. Representatives Lawlor, Luna, and Moskowitz |
| Legislative status | Introduced March 10, 2025; referred to committee |
| Advocacy and support | Bipartisan backing ; endorsed by NASFAA |
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