The three-and-a-half-year reprieve on interest for federal student loan borrowers came to an end Friday—but borrowers have new options when their repayment begins.
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Key Takeaways
Federal student loans began accruing interest Friday, ending an unprecedented three-year pause that began when the pandemic hit.
Borrowers using the new SAVE income-driven repayment plan can avoid having interest pile up on their loans.
New rules prevent most situations where interest would capitalize on loans, meaning that borrowers falling behind on payments won’t have to pay interest building on interest.
For the first time since March 2020, the Department of Education began charging interest on 38 million direct loans held by the government. Starting in October, borrowers will once again have to make required payments that had been paused as a pandemic relief measure.
For years, accumulating interest has been a major financial burden for borrowers, pushing up loan balances even for some who keep up with payments. Among borrowers who started paying back their student loans between 2010 and 2014, 56% had their balances increase at some point between when they entered repayment and 2017, according to a report by the Congressional Budget Office—a phenomenon that can leave borrowers feeling discouraged and hopeless about ever paying back their loans.
Although President Joe Biden’s plan to forgive up to $20,000 of debt per borrower was struck down by the Supreme Court in June, the administration has made several changes to the student loan system that could take the sting out of those interest payments and prevent balances from increasing.
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The SAVE Plan
Borrowers can sign up for the SAVE plan, a new kind of income-driven repayment plan that prevents interest from accumulating as long as borrowers make their payments.
Ballooning interest has especially hurt borrowers on previously-available income-driven repayment plans. Unlike traditional loan repayment programs, IDR plans set payment amounts based on the income of the borrower, and forgive any remaining balance after they’ve paid for 20 to 25 years. Borrowers whose payments weren’t enough to cover interest saw their loan balances increase over time, even if they were on track for forgiveness.
That can’t happen under the new SAVE plan as long as borrowers make payments, because any interest above the monthly payment amount won’t be charged.
Borrowers can enroll in the SAVE plan on the Department of Education website, and those with REPAYE plans will automatically be shifted to it.
Interest Capitalization Has Been Restricted
A less publicized rule change by the Department of Education now limits when student loan interest can be capitalized, or added to the balance of the loan.
When interest builds up, it simply adds to the total amount that a borrower owes. In certain situations, the built-up interest is then added to the balance of the loan, meaning that interest is now being charged on the unpaid interest as well. That can make loans grow exponentially, a bleak prospect for borrowers having trouble making payments.
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Under the new rules, interest will no longer capitalize the first time a borrower enters repayment, when they leave a forbearance, or when they leave most income-driven repayment plans.
