8 million federal student loan borrowers to have interest restart by Aug. 1

The U.S. Education Department said on Wednesday it will resume applying loan interest. Above, Northwestern University’s campus in Evanston, Ill. The New York Times

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By Tara Siegel Bernard

The New York Times

The U.S. Education Department said Wednesday that it would resume applying interest Aug. 1 to federal student loans held by nearly 8 million borrowers in the Biden-era repayment plan known as SAVE, which has been in limbo after being halted by legal challenges.

The shift is likely to take borrowers by surprise, giving them just weeks to consider their options at a time when loan servicers face significant backlogs in processing repayment plan applications. The entire student loan landscape is about to undergo even more upheaval — the domestic policy bill signed into law last week created new repayment options that will take effect next year.

SAVE borrowers’ payments have been on hold since last summer, and they will remain paused for now. But the Education Department is encouraging enrollees to move into another repayment plan.

The Saving on a Valuable Education plan, an income-driven repayment program that ties borrowers’ monthly payment amounts to their income, was a centerpiece of former President Joe Biden’s agenda, and it was more generous than its predecessor plans.

Because of its cost, two groups of Republican-led states challenged it in federal court in the spring of 2024, arguing that the Biden administration had overstepped its authority in developing the plan. It was blocked while the litigation worked its way through the courts, miring borrowers in uncertainty.

The Trump administration’s wide-reaching domestic policy law provides some clarity: Regardless of what happens in the courts, it will eliminate the SAVE plan and two other plans — Pay as You Earn, known as PAYE, and Income Contingent Repayment, or ICR — by June 30, 2028. Those will be replaced by two new repayment options next July, which advocates say they will cost many borrowers more.

For now, SAVE borrowers will need to make some decisions if they want to avoid accumulating interest. The Education Department will begin reaching out to SAVE enrollees Thursday with instructions on switching plans, and advises borrowers to use its loan-simulator tool to calculate monthly payments and figure out which plan may best meet their goals.

Though several income-driven repayment options are still available, the department is encouraging SAVE enrollees to consider the Income-Based Repayment plan.