Student loan borrowers are currently in the midst of unprecedented turmoil. New debt relief programs are facing multiple legal challenges, and court orders have upended wide swaths of the federal loan system, including repayment and student loan forgiveness.
The current state of student loan interest exemplifies this chaotic state of affairs. Untold numbers of borrowers owe more now on their student debt than what they originally borrowed, often despite years of payments, because of interest accrual and capitalization — a process by which outstanding interest gets added onto the loan principal. Several relief programs designed to address this longstanding problem have now been blocked. At the same time, millions of borrowers currently have no interest accruing on their student loans at all, even while relief in the form of loan forgiveness remains out of reach.
Here’s what’s going on, and the latest updates on student loan interest.
SAVE Plan Interest Subsidy Currently On Hold, Along With Student Loan Forgiveness
The Biden administration unveiled the SAVE plan last fall. Designed as a signature element of the administration’s broad debt relief efforts, SAVE is a new income-driven repayment program that offers borrowers lower payments and fast-tracked student loan forgiveness.
One uniquely beneficial feature of the program is an interest subsidy designed to prevent balances from ballooning due to interest accrual. Under IDR plans, borrowers can have affordable monthly payments, but if their payments are less than the amount of monthly interest that accrues, their balances could grow substantially over time. This leads to situations where, after years in IDR, some borrowers may could significantly more than what they started with, despite meeting their repayment obligations. SAVE ends this practice by waiving interest accrual that exceeds a borrower’s monthly payment.
But SAVE has been blocked by a federal court following legal challenges brought by several Republican-led states. Every element of SAVE — including student loan forgiveness, lower payments, and the interest subsidy — are now suspended. And other IDR plans may be threatened, as well. If SAVE ultimately gets struck down, borrowers may have to fall back on Income-Based Repayment, a less generous IDR plan that does not waive excess interest.
SAVE Plan Forbearance Halts Interest Accrual But Doesn’t Count Toward Student Loan Forgiveness
The eight million or so borrowers who had enrolled in SAVE or switched over from other IDR plans now find themselves in a forced forbearance as a result of the legal challenge. According to the Education Department, during the forbearance, borrowers will not have to make payments, and interest will not accrue on their balances. This essentially freezes borrowers’ balances as the litigation continues.
But the forbearance period will not count toward student loan forgiveness under either IDR or Public Service Loan Forgiveness. This puts borrowers in a tough spot. Either they can remain in the forbearance and potentially lose progress toward eventual loan forgiveness, or they can explore switching to another IDR plan like Income-Based Repayment, which may have higher payments and no interest subsidy (and as a practical matter, IBR is not currently available while IDR processing remains temporarily on hold). PSLF borrowers can explore the new PSLF buyback option instead, but this largely untested new benefit won’t be immediately accessible for many borrowers.
Student Loan Forgiveness For Runaway Interest Also Blocked
Meanwhile, a different federal court has blocked yet another Biden administration debt relief initiative that would have authorized student loan forgiveness for borrowers who have experienced runaway interest.
The new program, which would have provided relief to several groups of borrowers, would have been particularly beneficial for those who have seen their balances increase over time due to interest. The initiative would have cancelled up to $20,000 in accrued interest, and up to the full amount of accrued interest for those who earn income within certain thresholds.
But following a preemptive lawsuit brought by another group of Republican-led states, a federal court halted the program earlier this month and prohibited the Education Department from forgiving any student debt, including interest, under the plan.
“On Sept. 5, 2024, the U.S. District Court for the Southern District of Georgia issued a temporary restraining order on the proposed student loan relief regulations,” says a new note on the department’s published guidance for the program. “We are currently reviewing this order and will provide updates on this page as we learn more.”
New Federal Student Loan Interest Rates Are The Highest In Two Decades
The Consumer Financial Protection Bureau issued a bulletin last week warning that interest rates on new federal student loans were approaching historic highs.
“Student loan interest rates are at their highest level in almost two decades,” said CFPB Director Rohit Chopra in a statement on X on Friday. The higher rates “will increase the costs for millions of student loan borrowers.”
“Interest rates for undergraduate loans have increased to 6.53% this year, nearly a 19% increase over last year and a 44% increase from just five years ago,” said the CFPB bulletin. “For graduate and parent borrowers, costs were raised to their highest levels since 2006, with interest rates set over 9%.”
Interest rates on federal student loans are typically fixed at the time of their disbursement. So the higher rates will not impact borrowers who already took out student loans or are in repayment. However, the higher rates will increase the borrowing costs for those who are taking out loans for the current or upcoming academic term.
“Increasing student loan interest rates will cost borrowers thousands of dollars,” said the CFPB. “For example, for an undergraduate student leaving school in 2025, a student loan for the final year of college will cost $466 more compared to the same loan taken out just one year ago. For a graduate student or parent borrower, their final year of student loans will cost $497 more.”
Student Loan Interest Rates Likely To Come Down Soon For Some
While student loan interest rates are at historic highs, they may be peaking, and moderation may be on the horizon. The Federal Reserve is widely expected to cut interest rates by either a quarter point or a half point at a critical meeting this week — the first of what may be several reductions.
The interest rate cut should reduce interest rates on new federal student loans in subsequent academic years. The rate cut may also help private student loan borrowers who have variable interest rates, a type of interest rate that adjusts periodically with market conditions.
But the anticipated rate reduction would not have any impact on borrowers who already took out fixed interest rate student loans when rates were at their peak.
“Even if interest rates decrease for future student loan originations, the rate on federal student loans remains the same throughout the repayment period,” notes the CFPB. “As a result, borrowers who take on federal student loans this year will always make higher payments than others who borrow in a lower interest rate environment.”