KEY TAKEAWAYS

  • Student loan repayments begin again on Oct. 1, 2023.
  • Payments go a lot further with the changes in how federal student loans are structured.
  • These changes could result in more people paying off or having their loans forgiven faster than they have in the past.

Again and again, different experts have turned to the same phrase to describe the changes that President Joe Biden has made to student loan payments: “game changer.”12

In addition to the SAVE plan, which overhauled income-driven repayment plans, the White House has made smaller changes to the way student loans are repaid in an effort to help financially stretched borrowers.

Ahead of the Oct. 1 repayment deadline, the administration reduced how fast interest can pile up on loans and gave borrowers a one-year “on-ramp” period in which late payments won’t be reported to credit bureaus and delinquent loans won’t be put into default or collections.

There’s no doubt, the rules have been changed—and the changes have been in favor of borrowers.

Eliminating Interest Capitalization

For some borrowers, interest capitalization was the bane of their financial lives.

Normally, student loans charge simple interest—that is when interest is charged on the loan balance.3

But if interest piles up because the borrower is not paying—for instance, if they are on an income-driven repayment plan with payments lower than the interest charged or they are in forbearance—no interest is charged on that additional interest. In other words, it doesn’t compound.45

However, the interest can be capitalized in certain situations, thus being added to the loan balance. Those circumstances included the first time a borrower entered repayment, exiting forbearance, or leaving an income-driven repayment plan.

For some borrowers, interest capitalization helped drive their balances to levels they felt overwhelmed or could never repay.