Again and again, different experts have turned to the same phrase to describe the changes that President Joe Biden has made to student loan payments: “game changer.” 

In addition to the SAVE plan, which overhauled income-driven repayment plans, the White House has made smaller changes to the way student loans are repaid in an effort to help financially stretched borrowers.

Ahead of the Oct. 1 repayment deadline, the administration reduced how fast interest can pile up on loans and gave borrowers a one-year “on-ramp” period in which late payments won’t be reported to credit bureaus and delinquent loans won’t be put into default or collections.  There’s no doubt, the rules have been changed—and the changes have been in favor of borrowers. 

Eliminating Interest Capitalization

For some borrowers, interest capitalization was the bane of their financial lives. 

Normally, student loans charge simple interest—that is when interest is charged on the loan balance.

But if interest piles up because the borrower is not paying—for instance, if they are on an income-driven repayment plan with payments lower than the interest charged or they are in forbearance—no interest is charged on that additional interest. In other words, it doesn’t compound.

However, the interest can be capitalized in certain situations, thus being added to the loan balance. Those circumstances included the first time a borrower entered repayment, exiting forbearance, or leaving an income-driven repayment plan.

For some borrowers, interest capitalization helped drive their balances to levels they felt overwhelmed or could never repay.

Kelly Kimmel, 57, a family advocacy coordinator for a neonatal intensive care unit at a large children’s hospital in Norman, Okla., recently graduated with a social work degree. She said she had been dreading the interest capitalizing on her $60,000 loan when she began repayment since it would add about $8,000 to her balance.  “They need to fix the interest issue. That is what kills everyone,” she said. 

As of July, the rules for interest capitalization did, in fact, change: The Department of Education said it no longer capitalizes interest on federally-held direct loans except for when a  borrower exits a deferment on an unsubsidized loan or if they leave Income-Based Repayment (a certain kind of income-driven repayment plan).

“It's complicated, but it really is a big deal,” said Betsy Mayotte of the changes. Mayotte is president of the Institute of Student Loan Advisors, a nonprofit group offering borrowers free student loan advice.

Forgiveness Out of the Blue

A slew of rule changes immediately and dramatically impacted 3.4 million borrowers who had their loans forgiven. 

In October 2021, the Department of Education changed the rules for the Public Service Loan Forgiveness program. This Bush-era initiative forgives remaining balances for borrowers who work for government organizations, including schools, or for nonprofit groups for 10 years while making payments on their student loans. 

The rules, however, were convoluted, and very few people were able to get their loans discharged. Out of 1.3 million who had certified working for a qualified PSLF employer, only 16,000 had ever had their loans actually forgiven as of 2021.

Biden’s rule changes, including changing how payments were counted, have resulted in 662,000 public servants receiving $45.7 billion in student loan forgiveness as of September—41 times as many people as had gotten forgiveness from the program’s creation in 2007 until the pandemic. Older income-driven repayment plans also got an overhaul. In August, the Department of Education adjusted payment counts for borrowers, pushing them closer to forgiveness under IDR plans and in many cases, over the finish line. 

The changes, which included counting late and partial payments and counting up to three years of forbearance as having been in payment, resulted in 804,000 IDR borrowers receiving $39 billion in forgiveness.

It was a seismic overhaul for a type of loan so difficult for borrowers to manage that, as of June 2021, only 157 borrowers had ever received forgiveness.

Rule changes also benefited 491,000 borrowers with total and permanent disability, who received $10.5 billion in forgiveness. Another 1.3 million who said they were cheated by their schools, had their schools close or were involved in various lawsuits against schools for misleading students collectively had $22 billion forgiven under Biden.

Easier to Discharge Through Bankruptcy

While it wasn’t impossible, student loans were notoriously difficult to discharge through bankruptcy, the last legal resort for borrowers who are unable to repay their debts. 

Unlike other kinds of debts, borrowers had to prove to courts their student loans posed an “undue hardship,” a claim that government lawyers usually opposed. A 2020 analysis by Jason Iuliano, a law professor at the University of Utah, found that out of the 250,000 people with student loan debts who filed for bankruptcy each year, fewer than 300 got their student loans discharged.

In November, the Department of Justice released guidelines for government attorneys telling them to go along with debtor requests for “undue hardship” determinations as long as they meet certain criteria and detailing their financial circumstances.

“The new guidance has the potential to provide a meaningful avenue for relief but its effectiveness will depend on how it is implemented by the Departments of Education and Justice,” John Rao, an attorney at the National Consumer Law Center, an advocacy group, said in a statement at the time. 

An On-Ramp and a Clean Slate

Borrowers in default can become current by signing up for a repayment plan, including SAVE, under a temporary “fresh start” initiative. 

This has a number of advantages for borrowers, including allowing them to take out student loans and other government loans. On top of that, all borrowers in default were reported to credit bureaus as “current,” improving their credit outlooks.

Borrowers unable to resume payments in October will be shielded from the worst consequences of missed payments for a year. During a temporary 12-month “on-ramp,” borrowers won’t be reported to credit bureaus as delinquent, and won’t have their debts put into default or collections. 

High Interest Rates, and Even Inflation, Can Be Your Friend

Another unlikely ally for student loan borrowers is today’s high interest rate environment. 

Federal student loans have fixed interest rates, and borrowers with older loans got them at a time when rates were lower. Loans made during the pandemic, for example, carry interest rates of 2.75%, versus today’s rate of 4.99%.

Borrowers in good financial shape can take advantage of this by buying 10-year treasury notes—which currently pay close to the highest yields in decades—and use the returns to pay down student loan debt, says Christopher Day, a wealth advisor and founder of Days Global Advisors. Day said it may even be advantageous to shift money away from retirement account contributions and toward treasuries and paying down debt. 

Younger borrowers without a lot of cash also may want to consider paying down loans directly instead of contributing to 401(k)s, he said. 

In a way, inflation has made life better for debtors: Since inflation makes each dollar less valuable, the value of existing debts naturally goes down. Prices and wages both tend to rise during periods of inflation, but fixed-rate debt like student loans doesn’t get any costlier.

“The government right now is inflating away debt,” Day said. “The value of the dollar is less. So, therefore, it makes it easier to repay that debt.”

Biden’s Plan B For Loan Forgiveness

The Biden administration hasn’t given up on broad student loan forgiveness even after its legal defeat in the Supreme Court. Instead, it’s pursuing forgiveness through a process called “negotiated rulemaking,” a drawn-out bureaucratic process involving committees and multiple rounds of public meetings. 

The department will likely come out with its final forgiveness proposal in November 2024, before the presidential election, according to an analysis by researchers at the Brookings Institution, a nonpartisan think tank. 

Like Biden’s first attempt, any loan forgiveness proposal will likely face legal challenges from conservatives, who argue that forgiveness isn’t fair to non-college graduates and people who have already paid off their loans.

This article is the last in a five-part series reviewing the changes to the student loan landscape over the three years that payments on federal student loans have been paused. Installments covered changing rules for interest accumulation, how millions of borrowers got their loans forgiven under Biden and other ways the student loan landscape has been altered.