Adding unpaid interest to a borrower’s principal can unexpectedly grow their student loan balance, but the Biden administration wants to limit that interest capitalization — a move that could impact tens of millions of borrowers.
that shows 27 percent of people who started college in 2003-04 had a larger principal balance after 12 years than what they originally borrowed. Black borrowers and those from low-income households were overrepresented in that group, according to the department.the department notes that nearly 80 percent of Black borrowers surveyed had a forbearance at some point.
struggle with their debt because of economic discrimination and a lack of financial resources that often leads them to borrow at higher amounts than other groups.“We know that historical disinvestment in institutions that a majority of students of color attend often forces them to take out more debt,” Itzkowitz said. “This [proposal] will help us better ensure that they are able to repay their loans more manageably.
Student loan payments are first applied to any fees on a borrower’s account, then to interest and finally to the principal balance. Unlike mortgages or credit cards, interest on federal student loans adds up orFor people in traditional repayment plans, their monthly outlay covers all the interest that accrues between payments. Over time, the balance and interest these borrowers pay declines.
However, people enrolled in an income-driven plan can see their balances grow when their monthly payment is less than the amount of interest accruing between bills, leading to capitalization. Although these borrowers will have the outstanding balance on their loans forgiven after 20 or 25 years of payments, experts say there is a psychological impact to throwing money at a debt that just continues to grow.
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