Student loan interest rates are set to rise in the coming months. Here’s what it means for millions of borrowers.
Importantly, the interest rate hikes only apply to new federal student loans disbursed on or after July 1, 2022. Older federal student loan interest rates disbursed by the U.S. Department of Education are fixed based on the interest rates set at the time of their disbursement .
However, interest rates on all government-held federal student loans have been temporarily set at zero for over two years through the CARES Act, which also paused all student loan payments. That payment pause and interest freeze was . Unless Biden extends the relief further, interest rates on all government-held federal student loans will ultimately revert back to their original fixed rates in September.Student loan interest can be debilitating for borrowers. During most periods of nonpayment , interest typically accrues. This leads many borrowers to wind up owing much more than what they originally borrowed by the time they begin repayment.
For student loan borrowers on an income-driven repayment plan, which allows them to repay their loans using a formula tied to their income, their normal monthly payment may not even be high enough to cover all of the accruing interest each month, resulting in ongoing balance growth. To make matters worse, that accruing interest can be periodically capitalized, or added back on to the principal balance. This can have a compounding effect over time, resulting in substantial balance increases for some borrowers. Accrued interest can capitalize for a number of reasons such as entering repayment, changing repayment plans, failing to re-certify income under an income-driven plan, or ending a forbearance.that would eliminate a number of interest capitalization events.
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