President Joe Biden wants to lower your student loan interest.
Here’s what you need to know — and what it means for your student loans.
As part of significant changes to student loan forgiveness, Biden is revamping student loan interest to help student loan borrowers save money. The changes are part of a comprehensive effort to make student loan forgiveness more accessible to borrowers and to relax the rules to get your student loans canceled. Last week Biden announced major reforms to public service loan forgiveness, borrower defense to repayment and total and permanent disability. This includes a proposal to extend the limited waiver for student loan forgiveness permanently. Importantly, Biden also wants to lower student loan interest. Let’s explore.
Student loans: how Biden is lowering interest
Biden is lowering interest for millions of student loan borrowers who have federal student loans. The president wants to eliminate student loan interest capitalization — which is the process of adding accrued interest to the principal balance of your student loans — in certain circumstances. Commonly referred to as “paying interest upon interest,” student loan interest capitalization is one of the reasons why you paid your original student loan balance but still have a larger balance than when you started making student loan payments. Biden’s proposal would help student loan borrowers pay off student loans faster since overall student loan interest would be lower.
When student loan interest capitalization is removed
Specifically, Biden wants to limit student loan interest capitalization only to situations in which the Higher Education Act of 1965 requires it. For example, Biden wants to remove student loan interest capitalization in these circumstances:
- student loan interest capitalization on a defaulted student loan;
- student loan interest capitalization during student loan forbearance; and
- student loan interest capitalization following the end of a grace period.
When student loan interest capitalization is included
- if required by statute;
- for unsubsidized student loans following a period of student loan deferment; and
- when exiting most income-driven repayment plans.
Student loans: next steps
Importantly, Biden’s proposal won’t completely eliminate student loan capitalization. Rather, he proposes eliminating it when the Higher Education Act doesn’t require it. Does this mean Biden is lowering interest rates on student loans? No. Interest rates aren’t decreasing due to this proposal. Conversely, you should expect higher student loan interest rates in the coming months. Why? The Federal Reserve is expected to increase interest rates further to curb inflation. While Biden’s proposal hasn’t yet become law, you should expect that it will be implemented. The U.S. Department of Education will hold a 30-day public comment period during which anyone can provide feedback on the Biden administration’s proposals. The Biden administration won’t finalize these rules on student loans and student loan forgiveness until November 1, 2022. Expect this rule on student loan interest capitalization to be implemented by July 1, 2023. Before then, however, student loan payments for federal student loans will restart beginning on September 1, 2022. You can start saving money on your student loans with these great options:
- Student loan refinancing (lower interest rate + lower payment)
- Income-driven repayment (lower payment)
- Student loan forgiveness (federal student loans)