Looming payments put spotlight on ‘real danger’

Americans with student loans could see thousands of dollars in interest added to their accounts as part of President Biden’s backup loan relief plan.

The Biden administration is planning a proposed aid program to help millions of student loan holders deal with the double blow of October’s resumption of payments and the Supreme Court’s rejection of a sweeping debt forgiveness plan. are trying to take advantage of

Biden’s “ramp” repayment plan allows financially distressed borrowers to delay payments from October 2023 to September 2024 without fear of default or a negative credit score.

But unlike the current student loan moratorium, these loans will continue to accrue interest and have an even steeper slope to climb as borrowers start paying back.

What’s to come: Borrowers struggle to pay off student loans after years of high inflation

Experts fear millions of Americans who have relied on loan relief throughout the pandemic will be caught off guard under the new regime.

“You can imagine millions of borrowers who assume they won’t have to think about student loans for another year in the same way that they haven’t had to think about student loans for the past three years,” he said. rice field. Jonathan Petz is co-founder of Upsolve, a non-profit organization that helps people in financial hardship.

“I think we’re in a really dangerous situation right now for borrowers,” Petz said.

Interest could add thousands of dollars to a borrower’s debt

Student loan interest accrues daily, creating a serious challenge for borrowers.

The Biden administration is working to change how student loan interest is used, but the balance could rise significantly within a year.

Interest capitalization occurs when unpaid interest on a loan is added to the principal balance to accrue more future interest.

Last summer, the administration proposed new rules to limit the capitalization of interest except where necessary. It remains unclear whether the administration will utilize the loans during the loan opening period.

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For a borrower with $30,000 in debt, not making payments for one year while accruing interest would add $1,500 to the total amount, even if it was not capitalized and compounded. increase.

“If you can pay off the loan, you should. It’s a mistake because it doesn’t really provide financial relief,” student loan expert Mark Kantrowitz told The Hill.

“You don’t get punished for damaging your credit,” he continued. “But if you can pay off the loan, you should try to get out of debt as soon as possible.”

turn on payments after rapid inflation

More than 40 million borrowers are facing repayments and will be further strained by persistent inflation.

Prices rose 3.8% annually in May, according to the Personal Consumption Expenditure (PCE) Price Index. Inflation has fallen sharply from 7% annualized in June 2022, but is still well above the Federal Reserve’s 2% target.

Inflation is driving up the cost of goods and services, from house prices to gas to groceries, and student loans may only add to the burden for many, especially low-income families. .

“People shouldn’t have to pay interest during this 12-month lead-in period. Therefore, I urge the Administration to consider suspending interest payments,” said House of Representatives Alexandria Ocasio-Cortez after the president’s announcement. Rep. (New York) said.

The administration argued that the moratorium could not be extended again because the debt ceiling deal Mr. Biden signed with House Speaker Kevin McCarthy (Republican, California) included a clause that would require payments to resume this fall.

“Laws require us to end the payment moratorium this summer. We believe in the rule of law and we intend to follow it,” a White House official previously told The Hill.

‘Onramp’ is difficult for borrowers with fixed repayment plans

In addition to accruing interest, borrowers should be aware if they are enrolled in programs such as Public Service Loan Forgiveness, where loans are forgiven after a certain number of years.

The current three-year moratorium on loan payments counts as time before the loan is forgiven. This is not the case with lump sum repayment plans.

Art Young, executive director of the University of Arizona Office of Scholarships and Financial Assistance, said this was the “biggest negative impact” on Biden’s plan.

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Young’s office said it encourages students to contact loan servicers to review all repayment options and to ensure contact information is up to date.

Borrowers have a choice as the Biden administration introduces new programs that could help cover interest payments and reduce monthly loan payments.

The administration said eligible borrowers can enroll in the REPAYE plan, but will transition to the SAVE plan this fall.

Under the new plan, monthly payments will be reduced from 10% to 5% of discretionary income, ensuring that unpaid monthly interest won’t increase debt for borrowers if they continue to make monthly payments.

“What this means is that the federal government wants to say, ‘This program may not pay you full monthly payments, but it doesn’t accrue interest like it does with the 10-year Standard Plan and other similar plans.’ Plan a plan that accrues interest. said Fintech CEO Will Seeley, a certified B-corp. summera group that helps student loan borrowers get over debt.