New education sector rules ease rising student loan balances

Proposed by the Ministry of Education in July rule Eliminates most instances of interest capitalization for federal student loan holders who receive loans directly from the government. This change represents an important step towards slowing balance growth and creating a fairer repayment system for borrowers by addressing interest capitalization.

The Pew Charitable Trust warns that a significant rise in interest rates is a repayment barrier for many borrowers, and in a comment letter to the agency endorsed the agency’s general approach, helping borrowers stay on track as they pay off their loans. urged additional measures to help

As of 2012, nearly 6 in 10 student loan borrowers said interest capitalization, which occurs when unpaid interest is added to the principal balance of a loan, is often one reason. increase. Debt increased after paying off for 2 years Than when they left school. In his 2021 Pew survey, about four of his 10 borrowers who started paying off before February 2020 said they owe more than they originally borrowed at that point. I’m here.

Capitalization can occur at several points in a repayment, such as at the end of a grace period. It can also occur when a borrower consolidates a loan or defaults. In fiscal 2019 alone, $22 billion of accrued interest was capitalized and added to borrower balances. Ministry of Education data.

Interest capitalization is only one cause of balance growth, but it has a particular impact on borrowers who use IDRs, deferrals, moratoriums, or who default because they are unable to make payments on the standard 10-year repayment plan. may give

Pew’s focus groups with student loan borrowers across the country found that many felt strongly the negative effects of interest capitalization and growing balances, even after years of paying off. rice field. As your balance grows, they may hesitate to pay you back if you pay them on time and feel like you’re not making progress. Participants are assigned a name here to maintain anonymity.

Taylor, a student loan borrower from Miami, saw her loan balance “double like bread and fish” and felt, as a result, “no matter how hard I tried, I could never make it all the way through.”

Similar sentiments were echoed by others. Jordan, a student loan borrower from Detroit, said: …I will collect Social Security and my student loans will eventually be paid off. ”

For Sam, a borrower from Portland, Maine, the increasing balance was very disappointing and he felt that “given the statistical human lifespan, he would die before he could pay it back.” Focus groups held by other research groups Similar themes have been reported by student loan borrowers.

Eliminating many capitalization events in the department’s proposals would help address one component of the growth in balances experienced by borrowers, but such growth would likely increase monthly Continues for people enrolled in IDR plans whose payments do not cover accrued interest. IDR plans calculate monthly payments based on the borrower’s income and family size and are typically covered over a standard 10-year repayment period. Offer lower monthly payments than plans.

Borrowers enrolled in an IDR plan meet the criteria for loan forgiveness on the remaining debt after 20 or 25 years. eligible payment, but the increase in the balance still causes significant pain to the borrower. Pew estimates that many low-income borrowers will have most or all of their original balances forgiven if they join his current IDR plan. Case.

Pew’s project on student borrower success suggests several principles for reforming the student loan repayment system to curb the growth of outstanding balances broadly, some of which have already been addressed in the Department of Education’s proposal. I’m here. The federal government should:

  • Expand interest subsidies. Providing more subsidies (in whole or in part) to more borrowers can help address the negative impact of soaring loan balances. The Ministry of Education has announced a proposal for a new IDR plan. Includes an extended interest subsidy to cover all outstanding interest As long as the borrower makes the required monthly IDR payments. This full subsidy could help his IDR borrowers on the new plan avoid significantly the negative psychological and financial consequences of increased balances.
  • Enhance payment tracking. of Government Accountability Office (GAO) recently identified a serious flaw in the process used to count eligible payments. Accurate numbers are essential to confirm eligibility for loan forgiveness under the current range of IDR plans. Proposals to reduce the time it takes for low-income borrowers to receive forgiveness would address the psychological burden of long-term balance growth and allow loan servicers’ resources to be allocated more efficiently over time. should be considered in order to
    • Additionally, departments can explore whether progressive forgiveness is administratively feasible. Regular waivers of a portion of the borrower’s balance at shorter intervals, perhaps as an incentive to make a certain number of payments, can help maintain engagement in the repayment system and help policy makers and stakeholders Federal Student Loan Portfolio that can provide a complete picture of student repayment status. It also serves as an ongoing audit to ensure that servicers are counting borrowers’ eligible payments accurately.
  • We will continue to implement the FUTURE Act by unlocking resources for education. The department can take steps beyond the regulatory process to help borrowers make repayments more successful. Although the department’s proposed rule eliminates the interest capitalization associated with the termination of most IDR plans, the annual recertification process required for borrowers to remain enrolled in these plans remains a requirement for other plans. can cause problems. These may involve temporary enrollment in a standard repayment plan, in which case you may face affordable payments.

If codified, the proposed interest capitalization changes would reduce balance growth for many student loan borrowers, especially those most likely to have difficulty making payments. . The Department has already taken aggressive steps to eliminate interest capitalization where authorized. Actions like these represent a larger effort to improve the student loan repayment system by making repayments easier and more affordable for her 43 million Americans with federal student loans. is an integral part of

Brian Denten and Spencer Orenstein are board members and Lexi West is a principal associate of Pew’s Project for Student Borrower Success.

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