Interest on student loans is back: Here’s what to know

After more than three years, interest on student loans is back on beginning Friday as part of the Biden administration’s “on-ramp” repayment plan.

The start of September brings the return of interest on the loans, which unlike other types of debt accrues daily instead of monthly. 

Like payments on the loans, the interest had been on a pause that began at the start of the coronavirus pandemic and was renewed several times.

While payments themselves don’t resume until October, here is what borrowers need to know as interest resumes:

How student loan interest works

“I think practically, the most important thing about interest on a student loan is that because of how it accumulates, it can cause the value of your loan, the overall amount that you have to pay back, to increase pretty significantly,” said Jacob Channel, senior economist and student loan repayment expert at Lending Tree. 

The interest rate of a student loan is set when a borrower takes the money out, so it will be the same as before the COVID-19 pause. Even for borrowers who graduated during the pandemic and haven’t paid on their loans at all yet, the interest rate is still set at what it was when the loan was taken out.

Interest is one of the biggest difficulties for student loan borrowers because it allows the debt to grow quite rapidly if an individual is unable to make the full payments each month.

Can borrowers ignore the interest for now?

While interest has resumed, student loan payments will not kick back on for another month. 

Even then, under the Biden administration’s plan, there will be no financial consequences besides interest accrual for up to another year if a borrower skips their payments. 

However, if a borrower can afford it, making the payments and tackling the interest now will save money later and stop their account from ballooning over the next year. 

“If you are in a situation where you’re really worried about being able to make your student loans, I would say your best bet isn’t to plan on using the on-ramp,” Channel said. “Instead, it’s — right now — to be logging into your student loan service account, figuring out what your interest is and starting to budget. If you’re really worried about it, get in touch with studentaid.gov or your student loan servicer and ask about things like income-driven repayment plans.”

The Biden administration has also emphasized the difference between the on-ramp and the complete freeze during the pandemic.

“This is not the same as the student loan pause that has been in effect for the past three years,” President Biden said in an announcement, adding that “during this period, if you can pay your monthly bills, you should.” 

Can the interest be lowered?

There are multiple ways a student loan borrower can try to lower their interest rate.

Setting up automatic payments, negotiating with student loan lenders and refinancing loans can all lead to slightly lower rates.

Borrowers should also look at signing up for the new income-drive repayment plan called SAVE, which has changed the way interest is handled on loans. 

In the plan, unpaid interest will not grow if a borrower is able to make their full monthly payments. 

“As long as you make that payment, even if it is lower than what it would usually be, interest won’t capitalize,” Channel said. “In other words, the value of your loan will drastically increase just so long as you’re making your payment.”

Applications for the SAVE plan are now available on the Department of Education website and will take about four weeks to process, according to a department official.

What about student loan forgiveness?

Biden has begun a new process to get borrowers some debt relief, but details will likely not be finalized for months.

The Education Department has started the negotiated rulemaking process under the Higher Education Act as a new strategy to secure relief, but how much forgiveness and how many people will receive it may take months to find out.

“When the Supreme Court ruled against the Biden-Harris Administration’s student debt relief plan, we did not waste a moment opening up a new pathway to debt relief,” Education Secretary Miguel Cardona said.

While officials say they are confident this pathway is legal, there will likely be a new set of court battles once the plan is finalized and the administration tries to implement it, meaning any forgiveness could be quite far down the road.