Our team at Lendah knows that debt repayment of any kind can be a long and stressful process. But what happens to your repayment plan when the terms of the loan change? In the wake of President Biden’s final decision for student loan forgiveness, the topic of interest capitalization has been brought to the table. As we learn more about what will happen at the end of the forbearance period in December of 2022, it’s important to understand the impact that interest capitalization will have on your student debt repayment and how you approach paying off additional credit card debt.
What is Interest Capitalization?
Interest capitalization, according to Federal Student Aid, occurs “unpaid interest is added to the principal amount of your student loan. When the interest on your federal student loan isn’t paid as it accrues (during periods when you’re responsible for paying the interest), your lender may capitalize the unpaid interest.” While you have been benefiting from not having to pay interest during your forbearance, the interest that you didn’t pay hasn’t gone away and will likely be added back to your account. There is a possibility that the Biden administration has found a way around this.
Could Interest Capitalization Change?
Biden’s plan is to limit the times in which interest capitalization can occur. According to the CNN article, these are the instances that would no longer be affected:
- When a borrower with an unsubsidized Direct Loan enters repayment for the first time, typically six months after graduating or otherwise leaving school.
- When a borrower comes out of forbearance, a period of time when payments are not required often because a borrower is experiencing financial difficulties and requests relief.
- When a borrower defaults on a loan, which occurs when he or she fails to make a scheduled payment for at least 270 days.
- When a borrower leaves or fails to annually update his or her income for certain income-driven repayment plans, including the Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plans.
While this is the ideal solution to the increase in debt, it’s not set in stone. In the meantime, those with student loans should brace for the increase in overall student debt when December 31st arrives.
How Does Interest Capitalization on Student Loans Impact Your Debt Repayment?
In an instance of interest capitalization, the added interest not only increases the life of the loan but also the overall balance. This makes repayment much more difficult than it was before the forbearance period began. While the monthly payment may not change, with the significant increase in the overall debt, paying off your student loans could take more time than you ever imagined. Student loan debt, on top of credit card debt, can spell problems for your financial health, especially if you’re affected by interest capitalization. Fortunately, with debt consolidation loans, repayment can be swift and easy.
Debt Consolidation with Lendah
Whether you have one credit card on top of your student loan debt or many, a debt consolidation program from Lendah is the most effective way to cut down on the multiple monthly payments. A debt consolidation loan works to bring all of your outstanding debt to one account. At Lendah, we work with you and our partnered lenders to find the best debt consolidation program for your budget. You switch from multiple high-interest, constantly fluctuating monthly payments to just one fixed monthly payment that’s more manageable.
Learn more about how we suggest you approach your debt repayment when it comes to student loans from our blog!
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