Biden proposes to cut interest on student loans
President Joe Biden wants to lower your student loan interest.
Here’s what you need to know — and what that means for your student loans.
As part of significant changes to student loan forgiveness, Biden is revamping student loan interest for helping student borrowers save money. The changes are part of an overall effort to make student loan forgiveness more accessible to borrowers and loosen the rules for getting your student loans forgiven. Last week, Biden announced major reforms regarding the cancellation of public service loans, defending borrowers against repayment, and total and permanent disability. This includes a proposal to permanently extend the limited waiver for student loan forgiveness. Crucially, Biden also wants to cut interest on student loans. Let’s explore.
Student loans: How Biden lowers interest
Biden is cutting interest for millions of student borrowers who have federal student loans. The president wants to eliminate student loan interest capitalization — which is adding accrued interest to the principal balance of your student loans — in certain circumstances. Commonly referred to as “paying interest on interest,” capitalizing student loan interest is one of the reasons you paid off your original student loan balance, but still have a larger balance than when you have started repaying your student loan. Biden’s proposal would help student borrowers pay off student loans faster because overall student loan interest would be lower.
When student loan interest capitalization is removed
Specifically, Biden wants to limit the capitalization of interest on student loans only to situations where the Higher Education Act of 1965 requires it. For example, Biden wants to remove interest capitalization on student loans in these circumstances:
- capitalization of interest on an overdue student loan;
- capitalization of student loan interest during student loan forbearance; and
- capitalization of interest on student loans after the end of a grace period.
When student loan interest capitalization is included
- if required by law;
- for unsubsidized student loans after a student loan deferral period; and
- when exiting most income-driven repayment plans.
Student loans: next steps
Crucially, Biden’s proposal will not completely eliminate student loan funding. Rather, he suggests eliminating it where the Higher Education Act does not require it. Does this mean Biden is lowering interest rates on student loans? No. Interest rates do not decrease due to this proposal. Conversely, you should expect student loan interest rates to rise in the coming months. Why? The Federal Reserve is expected to raise interest rates further to curb inflation. Although Biden’s proposal does not yet have the force of law, you should expect it to be implemented. The U.S. Department of Education will hold a 30-day public comment period during which anyone can provide input on the Biden administration’s proposals. The Biden administration will not finalize these student loan rules and student loan forgiveness until November 1, 2022. Expect this student loan interest capitalization rule to be implemented by November 1, 2022. July 1, 2023. Prior to that, however, student loan payments for federal student loans will resume effective September 1, 2022. You can start saving money on your student loans with these great options: