Why are millions of US student borrowers suddenly facing $27 billion in new interest charges?
Millions of federal student loan borrowers in the US are facing a sharp increase in their debt as $27 billion in new interest charges are set to accrue over the next 12 months. This change affects around 8 million borrowers who had previously benefited from a Biden administration plan that temporarily paused interest accumulation.The sudden return of interest charges follows a series of legal and administrative actions, including the dismantling of the US Department of Education and a federal court ruling that blocked the Biden-era repayment plan known as the SAVE Plan. These developments have disrupted federal student loan servicing and repayment programs, impacting millions of Americans.The end of the SAVE Plan and department of education dismantlingThe SAVE Plan, introduced during the Biden administration, capped monthly payments at 5% of discretionary income for undergraduate loans and 10% for graduate loans while maintaining a zero percent interest rate. This program aimed to ease repayment burdens for borrowers with financial difficulties.However, a federal court injunction blocked the SAVE Plan in June 2024. The Trump administration declared the plan illegal and said it would resume charging interest to “bring fiscal responsibility to the federal student loan portfolio,” as reported by Politico. With the US Department of Education being dismantled under an executive order signed by Trump, the agency lost its ability to maintain or defend the plan.A spokesperson for the Education Department told Politico, “Loan servicers cannot process these applications as SAVE is no longer an option, as it is illegal.”Who is affected and the scale of financial impactApproximately 8 million borrowers will have interest charges resumed on their loans starting August 1. Newsweek reports that this will result in an estimated $27 billion in new interest costs over the next year.In addition, nearly 460,000 applications from borrowers seeking income-driven repayment plans with the lowest monthly payments are expected to be rejected. These applications represent 31% of a backlog of 1.5 million federal student loan applications, as cited by Politico.
Legal and policy background behind the changesThe Trump administration has maintained that previous Biden-era student loan forgiveness programs were unlawful. A spokesperson quoted by Politico said, “Congress designed these programs to ensure that borrowers repay their loans, yet the Biden Administration tried to illegally force taxpayers to foot the bill instead.”The executive order signed by Trump directs the closure of the US Department of Education “to the maximum extent appropriate and permitted by law,” shifting control of education programs to states and local communities. This shift has created uncertainty around loan servicing, repayment schedules, and forgiveness programs.TOI Education is on WhatsApp now. Follow us here.
