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How Student Debt Interest Cancellation Works

By Emma Diehl · March 30, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How Student Debt Interest Cancellation Works

Normally there is no simple way to cancel interest on student loans. There are programs under which different kinds of federal student loans could be forgiven or discharged, but they are not easy to qualify for.

Then there’s non-COVID-related forbearance, during which interest does accrue.

During the 2020-21 coronavirus-related “administrative forbearance,” interest rates were set to 0% on federal student loans held by the Department of Education through at least September 2021—and the interest did not accrue. So that’s a reprieve from interest but not a cancellation.

A case of major loan and interest cancellation did arrive in March 2021, when the Biden administration canceled $1 billion in federal student loans for borrowers who attended a school that had engaged in deceptive or illegal practices or closed suddenly.

How Does Student Loan Interest Work?

When borrowers take out a student loan, they should remember that they’ll end up paying more than the amount they initially took out, when all is said and done. That’s because loans come with interest or the amount a lender charges a person to borrow money, which will vary based on the type of loan.

Borrowers accrue interest on their student loans every day. Yep, every day. On top of that, the interest compounds, which means interest owed on a loan rolls into the loan’s total. Simply put, a borrower will pay interest on the interest.

The student loan interest rate does not change on income-driven repayment plans, but the plans can increase the total amount of interest you pay because repayment terms are expanded.

With a typical deferment or forbearance—postponement of student loan payments when you can’t afford them—interest usually accrues during the period (though the government picks up the interest tab during some deferments).

Reports have emerged of borrowers being asked to pay fees to suspend their payments s. That’s a scam. Anyone who encounters that kind of request can report it to the Federal Trade Commission’s Complaint Assistant .

Recommended: How To Calculate Student Loan Interest

Administrative Forbearance: Which Loans?

The government’s suspension of payments and interest did not apply to private loans.

It did apply to the following defaulted and nondefaulted federal student loans owned by the Department of Education:

•   Direct Loans, including subsidized, unsubsidized, Direct PLUS Loans, and Direct Consolidation Loans
•   Federal Family Education Loan (FFEL) Program loans
•   Federal Perkins Loans

If a borrower had a FFEL or Perkins loan not held by the Department of Education, they were beholden to the policy adopted by their lender or school. If their lender or school chose not to adopt the payment and interest waiver, then they were to keep making payments with interest.

Borrowers could choose to consolidate their loans with a federal Direct Consolidation Loan. But doing so after the 0% interest period could result in a higher interest rate than before.

This is true any time: Borrowers unsure of their federal loans’ status may want to contact their servicer for information. Policies are in flux, so loan servicers will know the latest.

How Forbearance and Deferment Normally Work

If you face short-term financial hardship, you may qualify for forbearance or deferment on federal student loans, providing a temporary suspension of payments.

During a normal forbearance, if you qualify, you can temporarily postpone or reduce your federal student loan payments, but interest will accrue on your loans.

During a normal deferment period, the government, not the borrower, pays the interest on some student loans, such as Direct Subsidized Loans, but interest will accrue on others, like Direct Unsubsidized Loans and Direct PLUS Loans.

During forbearance, you probably won’t be making any progress toward forgiveness or paying back your loan, the Federal Student Aid office notes, and gives this example:

If you have a loan balance of $30,000 and an interest rate of 6% and are in forbearance for a year right after you enter repayment, $1,800 in interest will accrue on your loans. If you do not pay that interest, it will capitalize (be added to your principal balance).

Because interest accrues on your principal balance, capitalization will cause more interest to accrue over time than if you had paid the interest. It will also increase your monthly payment under most repayment plans.

Forgiveness, Cancellation, and Discharge

There are several types of forgiveness, cancellation, and discharge for different kinds of federal student loans. Here are a few.

Public Service Loan Forgiveness

If you are employed by a government or nonprofit organization, you may be able to have your Direct Loans balance forgiven after 120 qualifying monthly payments.

Teacher Loan Forgiveness

If you teach full-time for five consecutive academic years at a low-income elementary school, secondary school, or educational service agency, you may be eligible for forgiveness of up to $17,500 on your Direct or FFEL Program loans.

Total and Permanent Disability Discharge

If you’re totally and permanently disabled, you may qualify for a discharge of your federal student loans and/or Teacher Education Assistance for College and Higher Education Grant service obligation.

Discharge in Bankruptcy

Available for Direct Loans, FFEL Program loans, and Perkins Loans, but bankruptcy rarely results in discharge of all debt..

Recommended: Is Paying Off Student Loans Early Always Smart?

What’s Known …

Any payment made during the administrative forbearance was to be applied to the principal of the loan, unless a borrower had accrued unpaid interest, which would have to be paid off first, according to the Consumer Financial Protection Bureau.

Nonpayments by borrowers working full time for qualifying employers were to count toward the 120 payments required by the PSLF program and as payments required to receive forgiveness under an income-driven repayment plan.

Collections on defaulted federally held loans were halted, as were garnishments.

… and Could Be Around the Bend

A lot can happen in a short amount of time. As of now, there’s lots of talk of forgiveness of federal student loans.

But if that does not happen, or happen in the amount some hope for, federal student loan borrowers must eventually resume payments at their loans’ original interest rate.

Those who anticipate a struggle to make payments may consider a number of repayment options, including income-driven repayment plans and federal student loan consolidation.

And those with private student loans might want to consider refinancing, especially if they have good credit and a stable income, during a time of low rates.

The Takeaway

Cancellation of student loan interest is rare. In a normal forbearance, interest accrues on student loans. And other than student loan cancellation from on high, en masse, it’s pretty darned hard to have loans forgiven.

While rates are low, it could be time to look at the rate of your private student loans and consider refinancing them. Student Loan Refinancing with SoFi can mean a lower interest rate and a different loan term.

Borrowers can consolidate both private and federal student loans into one new loan with one monthly payment.


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IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
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