Millions of federal student loan borrowers hit a critical milestone today, as student loan interest resumes for the first time in over three years.
The student loan pause officially concluded at the end of August. For nearly 40 months, most federal student loan borrowers have had their payments suspended and interest frozen. But federal spending legislation passed by Congress and signed by President Biden earlier this year to avert a debt ceiling crisis codified the end of the student loan pause. September 1st is the first day that borrowers covered by the moratorium will see student loan interest accrue again.
Here’s what borrowers should know.
Student Loan Interest Resuming As Student Loan Pause Ends
For most federal student loan borrowers, interest rates are fixed at the time of the loan’s disbursement based on rates set by Congress through legislation. That means that even though current market rates are historically high, these economic conditions have no impact on most federal student loan interest rates. As a result, most borrowers will see their interest rates return to the rates that were in effect prior to the student loan pause.
For borrowers who consolidated their loans via the federal Direct consolidation loan program during the student loan pause, the new interest rate is the weighted average of the underlying loans that were included in the consolidation, rounded up to the nearest eighth of a point.
New Student Loan Interest Benefits Implemented By Biden Administration
While interest accrual is now resuming, the student loan interest environment is somewhat different than what it was before the student loan pause began.
New regulations that became effective on July 1st have eliminated several triggers for interest capitalization. Interest capitalization occurs when interest that has accrued over time gets added on to the loan principal; this can lead to enormous balance increases due to the compounding effect of interest accruing on interest. Under the new rules, interest will no longer be capitalized in certain circumstances such as failing to re-certify on time for an income-driven repayment plan or exiting a forbearance.
In addition, President Biden’s new SAVE plan completely eliminates interest accrual that exceeds a borrower’s monthly payment as calculated under the program. This will prevent student loan balances from increasing over time for borrowers who enroll in SAVE.
No Student Loan Payments Due In September
While interest starts accruing in September as the student loan pause ends, most borrowers will not have to make any payments this month. The Education Department is treating the month of September as an administrative forbearance, during which no payments are actually due.
The Education Department indicates that even though no payments are due, the month will still count toward loan forgiveness for borrowers on track for Public Service Loan Forgiveness.
“Even though your first payment won’t be due until October, you’ll receive credit for September 2023 under the payment count adjustment if you’ve certified employment for that month,” says the department.
Student Loan Repayment Resumes In October As Biden Works On New Student Loan Forgiveness Plan
Student loan payments officially resume in October, which is when borrowers’ first billing due dates will be.
The Education Department encourages borrowers to do a number of things including updating your contact information, confirming your loan servicer, re-enrolling in auto-debit, and evaluating your repayment plan. Borrowers may also want to take a look at the new SAVE plan, which the Biden administration is describing as the most affordable repayment option ever.
The Biden administration has indicated that borrowers will not be penalized for missing payments during the next 12 months, although missed payments will not count toward student loan forgiveness under the IDR and PSLF programs. This “on-ramp” period is designed to provide borrowers with flexibility as the administration works to develop a new student loan forgiveness plan to replace the one struck down by the Supreme Court earlier this summer.
Further Student Loan Forgiveness Reading
Biden Administration Announces $72 Million In Student Loan Forgiveness
Student Loan Update: Only Days To Act On Some Key Repayment And Forgiveness Deadlines
Student Loan Forgiveness Update: What The Latest Court Victory Means For Borrowers
There’s Still Time To Qualify For Student Loan Forgiveness Under Adjustment