Regardless of Student Loan Forgiveness Outcome, New Regulation Will Keep Interest in Check

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We are less than two weeks away knowing the fate and future of President Joe Biden’s student loan forgiveness plan, which has been stalled since October due to two lawsuits filed by GOP-endorsed groups. Regardless of the Supreme Court ruling on Feb. 28, borrowers may benefit from a number of regulatory reforms that affect student loan interest specifically.  

Following the temporary blocking of President Joe Biden’s student loan relief program by a federal appeals court, the White House extended the federal student loan payment moratorium until June 30, 2023, or earlier if appeal litigation is resolved by the Supreme Court.

Writing at Forbes, attorney and student loan expert Adam S. Minsky states that when the Biden administration originally set new student loan forgiveness regulations in the fall of 2022, it altered the course of a number of repayment programs by defining future interest capitalization events and addressing accrued interest in REPAYE plan payments.

Limiting Interest Capitalization Events

Interest capitalization is accrued interest — unpaid during forbearances or periods of deferment, like a payment pause — that gets periodically capitalized, or added, to your student loan balance and that can balloon at a “frightening rate,” says Minsky. At repayment time, you’ll be paying interest on the capitalized interest.

Minsky notes that in the case of income-driven repayment (IDR) plans, accrued interest can outweigh a borrower’s monthly payment. However, according to Forbes, while new regulations only affect future capitalization events and won’t stop interest from accruing, the Department of Education has put event limits in place starting July 1 to stop interest from capitalizing in the following circumstances:

  • When a borrower first enters repayment
  • When a borrower leaves a forbearance
  • When a borrower in the Pay As You Earn (PAYE) plan no longer has a partial financial hardship or leaves the plan
  • During periods where a borrower’s monthly payment is less than the amount of monthly interest accrual while the borrower is in certain IDR plans or on an alternative repayment plan
  • When a borrower defaults
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Stopping Excess Interest Accrual

Proposed regulations to the Revised Pay As You Earn (REPAYE) IDR plan introduced last month by the Biden administration promised to eliminate interest accruing in excess of a borrower’s monthly payment. With further Republican opposition to waiving excess interest sure to come, a date hasn’t been set for these REPAYE changes to take effect. However, when implemented, any monthly interest accrued that is more than what a borrower’s pays in their monthly REPAYE plan will be let go.  

“This would prevent interest from accruing entirely for borrowers who have low-enough income to have a calculated monthly payment of $0. For other borrowers, it will stop their loan balance from increasing while they are in the plan,” writes Minsky.

Although interest will start to accrue for borrowers once the current student loan payment pause is lifted, loan repayment depends on when the Supreme Court justices reach a decision on the legitimacy of President Biden’s plan, which could be a few weeks after the end of February or sometime in the summer.

If the court judges Biden’s loan forgiveness plan to be legal, the Department of Education can re-open the student loan forgiveness application process and begin to process the 26 million applications it has already received, according to Forbes.

But if the court of last resort rules in favor of the GOP-led lawsuits, Biden’s sweeping student loan forgiveness program will be effectively quashed, opening the possibility to extend the student loan pause for an eighth time since March 2020.

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