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Millions of borrowers who have seen their student loan balances increase over time due to accrued or capitalized interest may be eligible for student loan forgiveness starting this fall under a proposed Biden administration plan. The plan targets certain groups of borrowers for relief, with those making $120,000 or less receiving the most significant relief. This relief would come as welcome news for many borrowers as federal student loan interest rates are set to reach record highs this summer.

Many borrowers have watched their student loan balances increase substantially over time due to various reasons, including the fact that most federal student loan debt is unsubsidized, meaning interest is not covered during certain periods. Additionally, certain repayment plans and payment postponement programs can leave borrowers owing more than what they originally borrowed. Historically, events like leaving forbearance or changing repayment plans could trigger interest capitalization, further increasing the borrower’s balance.

Under Biden’s proposed student loan forgiveness plan, all federal borrowers could receive up to $20,000 in forgiveness if they have accrued or capitalized interest since entering repayment. Lower-income borrowers could potentially receive complete student loan forgiveness of their accrued or capitalized interest if they make $120,000 or less annually and are enrolled in an income-driven repayment plan. The plan could benefit other groups as well, including those eligible for existing student loan forgiveness, borrowers who entered repayment at least 20 or 25 years ago, and people experiencing significant hardships.

The Education Department published draft regulations for the first four categories of borrowers last month, with plans to finalize these regulations and potentially implement them this fall. The program could be enacted automatically for many borrowers without the need to formally apply, but some borrowers, particularly those experiencing hardship, may need to submit an application. Legal challenges and the outcome of the upcoming presidential election could impact the program’s implementation and potential delays.

The proposed student loan forgiveness comes as federal student loan interest rates are expected to reach record highs in the upcoming year. Interest rates for federal student loans are based on the high yield of the 10-year Treasury note at auction, with rates expected to increase by around 1%. Despite these increases, most federal student loan interest rates are fixed at the time of disbursement and do not change with market conditions. The Biden administration has also implemented other reforms, such as the SAVE plan, to provide relief to borrowers experiencing interest accrual.

Overall, the Biden administration’s proposed student loan forgiveness plan aims to provide relief to borrowers who have seen their student loan balances grow due to accrued or capitalized interest. The plan targets specific groups of borrowers, particularly those making $120,000 or less annually, for the most significant relief. As federal student loan interest rates are set to reach record highs, this forgiveness would come as a welcome relief for many borrowers struggling with their student loan debt.

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