President Joe Biden is taking steps to help student loan borrowers curb what his administration calls “runaway interest” on federal student loans. Many borrowers make payments for years without making a significant dent in their loans due to accumulating interest. The Biden administration plans to forgive excessive interest charges, potentially as early as this fall. The forgiveness plan is part of a broader student debt relief plan that will be open for public comment before implementation, with the administration hoping to initiate the interest forgiveness provision as soon as possible.
Under Biden’s loan forgiveness plan, borrowers whose loan balances are larger than when they first entered repayment could be eligible to have up to $20,000 of their balance growth forgiven. Low and middle-income borrowers on income-driven repayment plans could see even more of their balance growth canceled. Single borrowers earning $120,000 a year or less, or married couples earning $240,000 or less, enrolled in IDR plans could have the entirety of their balance growth wiped out. If enacted, borrowers would not need to apply for this interest relief. Roughly 25 million federal borrowers stand to benefit from Biden’s interest cancellation plan, with 23 million expected to have their balance growth wiped out.
Interest rates on federal student loans are relatively low, but high loan balances combined with certain payment plans and forbearance periods can lead to borrowers seeing their loan balances continue to rise despite regular payments. On the standard repayment plan, minimum monthly payments cover any accrued interest each month to ensure full loan repayment in 10 years. However, on income-driven repayment plans, minimum monthly payments may not cover interest, leading to it accumulating and potentially capitalizing. Interest can also accrue during deferment or forbearance periods, with unsubsidized loans accruing interest while in deferment and capitalizing once payments resume.
Biden’s interest forgiveness plan aims to provide relief to borrowers who have been making payments for years without seeing their balances decrease. The administration plans to implement the remainder of the debt forgiveness plan as quickly as possible after starting with the interest benefits. Borrowers with loan balances larger than their original amount when entering repayment could see up to $20,000 in balance growth forgiven under the new plan. Eligibility requirements for interest relief include income limits for borrowers on income-driven repayment plans, with some borrowers potentially having the entirety of their balance growth canceled.
The administration estimates that around 25 million federal borrowers could benefit from Biden’s interest cancellation plan, with the majority expected to have their balance growth wiped out entirely. Interest that accumulates on student loans due to high balances, certain repayment plans, and forbearance periods can lead to borrowers owing more than they originally borrowed. The interest forgiveness plan is designed to address this issue and provide relief to borrowers struggling to make progress on their loans. Biden’s broader student debt relief plan will undergo public comment before being fully implemented, with the administration aiming to roll out the interest forgiveness provision as early as this fall.
