Biden’s plan to prevent skyrocketing interest on student loan debt
Daniel Tapia, 41, obtained his bachelor’s degree in dental hygiene more than ten years ago. But his financial situation has been far from easy since then.
“I’m financially crippled by crippling debt and I can’t move forward in life,” Tapia previously told Insider. “Murdered by the student loan industry.”
To pay for his degree, Tapia had to take out private and federal student loans, and although he originally borrowed $60,000, his balance is now $86,000 and growing. This is thanks to the interest on the debt which has continued to add to his main balance, thus increasing the amount of debt which accumulates in what seems like an endless spiral. This even prevents him from touching the initial amount to which he has agreed to borrow.
What Tapia has been through with her student loans is far from uncommon. Insider spoke to more than two dozen borrowers who reported the crushing burden of student debt they have, much of it caused by compounding interest. For some, this can be debilitating, keeping them in an endless repayment cycle. Throughout the pandemic, however, most federal borrowers have been relieved of the spike in interest thanks to the student loan payment pause, which waived interest and is set to expire after Aug. 31.
Although President Joe Biden’s Education Department has yet to confirm whether another expansion is planned, it has released a list of regulatory proposals it plans to address over the next year, including reforms to major student loan forgiveness programs, providing relief to students. with debt but without a degree, and interest capitalization limits – which will likely be implemented after Biden makes a large student loan forgiveness for federal borrowers.
“What I don’t understand is that if I withdrew a certain amount and I’ve already paid that amount, and I still owe more than I originally owed, that’s just crazy,” Tapia said. “It’s mind-boggling to me that this total amount isn’t going down. It’s not going away.”
Biden’s proposal to deal with growing interest
Interest capitalization occurs when accrued interest is added to the original loan balance, and future interest increases by this higher amount. This is something the Ministry of Education hopes to prevent, where possible, through its regulatory proposals.
According to the department’s 750-page preamble to regulations, interest capitalization is most often boosted after periods of student loan deferral or forbearance. The Ministry proposes to limit funding only to cases where it is specifically required by the Higher Education Act. The preamble states that this would result in a loss of revenue as there would be fewer capitalization cases, thereby increasing costs to the government and US taxpayers.
“However, the proposal is expected to result in lower total payments over time for borrowers, thereby increasing the likelihood that borrowers will repay their loans in full,” the preamble states. “Given this benefit, the department believes the benefits to borrowers outweigh these costs and justify the change.”
The Higher Education Act states that capitalization of interest can occur when a loan goes into repayment, when a grace period expires, when deferment or forbearance periods expire, and when a borrower defaults. . Currently, the department annually capitalizes unpaid interest during any negative amortization period – in which a borrower fails to cover the interest owed on the loan – and it seeks to end capitalization cases that are permitted, but not required by law.
Specifically, the ministry wants to remove:
- Capitalization of interest on loans entering repayment after a grace period
- Capitalization of interest on direct loans during forbearance periods
- Annual compounding of unpaid interest when a borrower’s income-contingent repayment plan does not cover accrued interest
- Capitalization of interest on an overdue loan
The ministry says it does not remove funding when required by law, including when a borrower exits a deferment period on an unsubsidized loan, or when a borrower on a repayment plan based on income no longer has partial financial hardship.
In its explanation for proposing the rule, the department notes the “financial and psychological challenges” that accompany the growing interest.
“Carrying over unpaid interest on a borrower’s principal balance can be a frustrating experience for borrowers who are confused about what triggered the capitalization or surprised by the higher amount they owe due to capitalization”, indicates the preamble. “Borrowers also frequently express frustration and surprise at interest capitalization, at least in part because it’s not something they’re likely to have encountered with other financial products.”
The proposed rules will be subject to public comment for a 30-day period, and the ministry aims to finalize them by November, with implementation by July 2023.