Biden Rolls Out New Interest Benefits As Student Loan Payments Resume

Student loan payments and interest are set to resume in a matter of weeks as a three-year moratorium on federal student loan repayment comes to an end. But as student loan borrowers prepare for the return to repayment, the Biden administration is rolling out new interest benefits that will impact millions.

Here’s the latest.

When Student Loan Payments Resume And Interest Starts Accruing Again

The student loan pause is set to expire at the end of August. President Biden signed legislation codifying the end of the payment pause, so unless there is a new national emergency distinct from the Covid-19 pandemic, he will not be able to extend the pause again.

Interest will start accruing again in September. Interest rates for most federal student loans are fixed at a rate set by Congress based on the date of the loan’s original disbursement, and do not change with market conditions. So for most borrowers, interest rates will return to the rates that were in effect when the student loan pause was initially implemented.

Loan servicers will generate billing notices in September. And the first student loan billing due dates will be in October, according to the Education Department.

Interest Should Not Capitalize When Student Loan Payments Resume

Historically, when federal student loan payments were paused during a forbearance, interest has still accrued. And when the forbearance ends, all of that accrued interest would be capitalized, meaning added on to the loan principal. Interest would then continue accruing on that inflated balance, accelerating balance growth over time.

But according to the Education Department, outstanding interest should not be capitalized after the student loan pause ends. “For most borrowers, unpaid interest will not capitalize during the payment pause and through six months after the payment pause ends,” according to published guidance.

The department has also “asked loan servicers to undo interest capitalization that has an effective date after March 13, 2020. Your loan servicer will reach out if they are reversing your capitalized interest.”

Biden’s New Student Loan Payment Plan Will Waive Excess Interest

Last month, the Biden administration unveiled a new Income-Driven Repayment plan. The Saving on a Valuable Education, or SAVE, plan, will be the most affordable IDR plan ever created, according to the Education Department. SAVE will result in lower monthly payments for millions of borrowers, as well as accelerated student loan forgiveness for some.

In addition, the SAVE plan will waive excess interest accrual for borrowers who enroll. Currently, there is no requirement that borrowers in an IDR plan cover their monthly interest accrual. That means in situations where a borrower’s monthly IDR plan is less than the amount of monthly interest accrual, their loan balance would increase over time, even while the borrower makes payments and keeps their account in good standing. This process of ongoing balance growth during repayment is called negative amortization.

The SAVE plan will eliminate negative amortization. This means that for borrowers whose monthly payments under the plan are less than the amount needed to cover monthly interest accrual, that excess interest accrual will get waived on a rolling basis. This does not stop all interest from accruing, unless a borrower’s monthly payment under SAVE is zero (which is possible for some lower-income borrowers). However, it will stop a borrower’s student loan balance from growing.

The SAVE plan will be phased in over the course of the next year. But according to the Education Department, the interest benefits of the plan will be available to borrowers when student loan payments resume. The SAVE plan is replacing the Revised Pay As You Earn plan, and borrowers already enrolled in REPAYE will be able to receive the interest benefits from the SAVE plan automatically, according to the department.

New Regulations Will Limit Future Student Loan Interest Capitalization

The Biden administration has also rolled out new rules that will limit instances of future interest capitalization. The new regulations, which went into effect as of July 1, will prohibit interest capitalization in the following cases:

When a student loan borrower first begins repayment;
After a forbearance ends;
When a borrower goes into default;
When changing repayment plans from the the Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), or Income-Contingent Repayment (ICR) plan to another plan;
When a borrower fails to receritfy for the PAYE, REPAYE, or ICR plan on time;
During periods of negative amortization in the ICR plan (which historically has required annual interest capitalization).

The new regulations won’t undue any previous interest capitalization that already occurred. But as of July 1, they will prevent interest capitalization for these events going forward.