Student Loans: Interest For SAVE Plans Resumes This Week—What To Know

Forbes

5 days ago

The Trump administration will resume charging interest this week on student loans under the Biden-era SAVE plan, which have been on hold while the plan's tied up in court—potentially costing nearly 8 million borrowers an extra $3,500 per year in interest.
Education Secretary Linda McMahon testifies during a Senate hearing on June 3 in Washington, DC. Getty Images
The Trump administration will begin charging interest on the loans starting Aug. 1, following a July 9 announcement by the Education Department, though borrowers will not have to resume making payments until the forbearance period ends.
The SAVE plan was established by the Biden administration and offers borrowers a more flexible and affordable way to pay back their loans, but borrowers enrolled in the plan have had their loans in forbearance since last summer, after federal courts blocked loan forgiveness under the plan in response to a lawsuit from GOP state attorneys general.
Borrowers previously did not have any interest accrue on their loans while the legal case proceeds, and it's unclear how much longer the litigation will take to play out, though the Education Department previously said borrowers should not expect to resume payments until December at the earliest.
The change will affect approximately 7.84 million borrowers with loans under the SAVE plan that are now in forbearance, according to the Education Department, with the Student Borrower Protection Center (SBPC) projecting in an analysis that resuming interest will result in an extra $27 million in combined accrued interest over a 12-month period.
The average borrower enrolled in the SAVE plan will be charged approximately $3,500 more in interest per year, or approximately $300 per month, versus if the interest accrual had remained on hold, the SBPC predicted.
The Department of Education argued the change regarding interest accrual is necessary because of a February court ruling that broadened the scope of the court order pausing the SAVE plan, claiming the ruling blocked the provision of the law the government used to justify not charging any interest.
The Trump administration recommends that borrowers whose loans are in forbearance under the SAVE plan should try to move their loans to a different income-driven repayment plan. It's unclear how long that would take, however, as while the Trump administration is processing applications for those plans, there's also been a significant backlog when it comes to application processing. The Education Department said in a June court filing that 1.5 million applications for income-driven repayment plans had still yet to be processed, meaning that while borrowers can try to change to another plan, it may take a while to do so. The agency said in July that any borrowers who have previously submitted an application for income-driven repayment and selected the Income-Based Repayment, Pay As You Earn, or Income-Contingent Repayment plans will not have to submit a new application. Borrowers who remain enrolled in the SAVE plan are still not required to resume making payments on their loans, but the Education Department notes they can make interest-only payments to their loans if desired. How Does This Affect Student Loan Forgiveness?
The months spent in forbearance under the SAVE Plan will not count toward loan forgiveness through the Public Service Loan Forgiveness or Income-Driven Repayment programs, which require borrowers to make payments for a certain number of months before their remaining loan balance is forgiven. That's still the case even once interest starts accruing on Aug. 1, according to the Education Department, so borrowers will have to switch plans in order to start having months count toward their forgiveness again. Borrowers eligible for Public Service Loan Forgiveness may also be eligible to 'buy back' some months of their payment history in order to make them count toward forgiveness, if doing so would complete their total number of qualifying payments for forgiveness. In addition to the court order stopping payments under the SAVE Plan, court orders are also now blocking the government from providing any loan forgiveness under the SAVE Plan, Pay As You Earn Repayment Plan (PAYE) and Income-Contingent Repayment Plan (ICR). Forgiveness is still allowed under the Income-Based Repayment Plan (IBR), and the Education Department notes payments made under the SAVE, PAYE and ICR plans will count toward forgiveness after borrowers switch over to an IBR plan. That being said, forgiveness under IBR plans is on hold right now while the Education Department updates its systems.
The SBPC disagrees with the government's claim that it was legally required to start charging interest again, arguing in its analysis that the February court ruling does not include any 'discussion of the legality of the Department's temporary, interest-free SAVE forbearance.' 'Despite representations by the U.S. Department of Education … to the contrary, no federal or state court—including 8th Circuit Court of Appeals—has issued an order instructing the Department to resume charging these borrowers interest or calling into question the Secretary's authority to waive interest accrual for borrowers whose payments have been suspended,' the organization said. Key Background
Student loans have become a controversial political topic in recent years, as Democrats have made forgiveness a key issue while Republicans strongly oppose it. The SAVE plan was one of a number of incremental initiatives the Biden administration implemented in order to forgive student debt and lighten borrowers' repayments, after a coalition of GOP state attorneys general successfully challenged the administration's more sweeping plan to provide relief to most federal borrowers. The Trump administration has sought to make major changes to the student loan program in recent months and roll back Biden-era forgiveness programs, with Education Secretary Linda McMahon saying in April, 'American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies.' The changes have included trying to move the federal student loan portfolio from the Education Department to the Small Business Administration and resuming debt collection for borrowers who have defaulted on their loans. President Donald Trump's domestic policy bill, which he signed into law last week, will also impose new limits on student loans and broadly overhaul the process for student loan repayments, limiting new borrowers to only two different payment plans. Further Reading Forbes How Trump's Spending Bill Will Impact Your Student Loans—As It Heads To President For Signature By Alison Durkee Forbes Trump Administration To Charge Interest On Student Loans In SAVE Plan By Adam S. Minsky Forbes Trump's Presidency And Student Loans: What Move To Small Business Administration Means For Borrowers By Alison Durkee Forbes Trump Resumes Defaulted Student Loan Collections Today—Impacting Millions Of Borrowers. Here's What To Know. By Alison Durkee