The way student loans accumulate interest could change under a proposed rule. Here's what to know

HEY, IT’S DAVE DIAZ WITH SDETUNT SUPPORT. IF YOU CAN GIVE ME A CALL BACK WHEN YOU RECEIVE THIS THE MESSAGES SOUND AUTHENTIC. I’M ACTUALLY JUST DOING A FOLLOW-UP CALL REGARDING YOUR STUDTEN LOAN, BUT ARE AUACTLLY FABRICATED. I DO HAVE YOU PRE-QUALIFIED HERE FOR REPAYMENT OPTIONS, ESPECIALLY FOR POSSIBLE LOAN DISCHARGE OR THE FORGIVENESS PROGRAM SCAM ARTISTS TARGETING COLLEGE GRADS SADDLEDITH W STUDENT LOANS. HOW OFTEN DO YOU THINK YOU’RE GETTING THESE? UH ONCE A WKEE COUPLE TIMES A WEEK. I GET LOT OF PHONE CALLS, ESPEALCILY. FROM CITIES THAT ARE REALL FARY AWAY MANYF O THEM WITH CERTAIN CHARACTERISTICS ALL OF THEM SAY LIKE COLLEGE LOAN FORGIVENESS IF YOU DON’T JOIN THIS PROGRAM, YOU'R’ GONNA MISS OUT ON YOUR OPPORTUNITY TO LIKE REALLY LIKE PAY OFF ALLOU YR LOANS, BUT NOT EVYER IS SAVVY JUST LAST YEAR THE FEDERAL TRADE COMMISSION SENT BACK MORE THAN 1.7 MILLION DOLLARS TO PEOPLE WHO WERE SCAMMED BY A GROUP ALLEGING TO BE WITH DEPARTMENT OF EDUCATION. WE ARE LIVING IN AN AGE WHERE IT IS SO EASY FOR SCAMMSER TO LIFT BRANDS LOGOS GRAPHICS. THE BETTER BUSINESS BUREAU SAYS SCAMMERS CAST A WIDE NET WHEN LOOKING FOR THE NEXTIC VTIM THOUGH STUDENT LOAN BORROWERS ARE PARTICULARLY VULNERABLE. I THINKT I TENDS TO ROUND BUMP, YOU KNOW WHEN STUDENTS ARE TECHNICALLY WALKING ACROSS THAT STAGE AND GETTING THEIR DIPLOMAS ESPECIALLY NOW SINCE THE WHITE HOUSE ANNOUNCEDHE T EXTENSION OF ITS LOAN REPAYMENT PLAN THROUGH SUMMER. SOMETHING SCAMMSER ARE TAKING ADVANTAGE OF FOR A STUDENT JUST GRADUATING THERE IS NOT A LOAN FORGIVENESS PROGRAM, RIGHT? SO IF YOUET G A TEXT THAT SAYS YOUR LOAN IS BEING COMPLETELY FORGIVEN. I WOULD BE WARY OF THAT SOME WAYS TO STAY ON THE UP AND UP ANYTHING ONLINE FROM THE FEDERAL GOVERNMENT WILL ALWAYS HAVE A DOT GOV URLF I USING A PRIVATE LENDER CHECK WITH THEM DIRECYTL BEFORE ANSWERING ANYONE'’ QUESTIONS EXPERTS ALSO SAY VOICEMAILS TTEX MESSAGES AND EMAILS PROMISING OR GUARANTEEING LOAN FORGIVENESS ARE A DEAD GIVEAWAY, ESPECIALLY IF THEY’RE RUSHGIN YOU LIKE THESE SCAMMERS. THE PREPARING PROGRAMS I ABOUT THE EXPIRES SOON. I DON’T WANT YOUR QUALIFICATION TO CHANGE. IT’S JUST IMPERATIVE THAT I SPEAK WITH YOU SOON AS JUST BEFORE YOUR STATUS EXPIRE. THEY NEED TO REALLYE B CAREFUL THAT TYHE ARE ACTUALLY TALKING TO THEIR LENDER ANDOT N TO JUST SOMEBODY WHO SAYS OH I CAN HELP YOU CONSOLIDATE THIS LOAN EXPERTS SAY WORKING WITH YROU LENDER DIRECTLY RIGHT AWAY IS THE BEST WAY TO AVOID BNGEI A VICTIM IN T

The Biden administration has a plan to slow interest from adding to borrowers' federal student loan debt balances.A proposed change to a federal rule announced earlier this month would limit the number of ways interest adds to the principal balance — known as capitalization. The change could go into effect as early as next summer after a formal review process takes place.Related video above: Student loan scammers targeting borrowers now more than everFederal student loans would still carry interest at a fixed rate that is set annually by law. The move wouldn't result in any cancellation of debt either. But the change could keep some student loan balances from spiraling upward, which can happen even when a borrower is making regular payments."This affects just about everybody," said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that offers free student loan advice to borrowers.Throughout the pandemic, most federal student loan borrowers have been spared from interest accumulation thanks to the pause on payments that also froze interest. But this pandemic-related relief is set to expire after Aug. 31.What is interest capitalization?When unpaid interest is added to the principal (the amount lent on which interest is paid), it's known as interest capitalization. Generally, this happens whenever a loan moves from a non-repayment status to a payment status, Mayotte said.Once capitalization occurs, future interest accrues on a higher amount, increasing the overall cost of the loan and sometimes the monthly payment amount.This does not happen every day. Instead, the unpaid interest continues to grow separately until an event occurs that triggers capitalization.Currently, there are several times when capitalization is triggered. For example, it happens when a borrower enters repayment after finishing school or at the end of a deferment or forbearance period when payments were temporarily postponed.Here's a simplified example. A hypothetical $10,000 student loan accrues $1 a day in interest. After 30 days, there is a $10,000 principal balance and a $30day interest balance. On the next day, a capitalization event occurs. If no payment is made, the principal balance is now $10,030 and interest is now accruing by more than $1 a day, at an amount based on the interest rate and new principal.What would Biden's proposal do?The rule changes proposed by the Biden administration would limit the times when capitalization would occur. In some instances, capitalization is required by law and cannot be changed by the administration. One example is when a borrower's deferment period ends.The new proposal aims to prevent interest capitalization when it's not required by statute. The changes would only apply to federal Direct Loans. Interest capitalization from the Federal Family Education Loan program, which ended in 2010, would remain the same.Under the proposed rule, interest would no longer capitalize at these times:When a borrower with an unsubsidized Direct Loan enters repayment for the first time, typically six months after graduating or otherwise leaving school. (Unlike a subsidized loan, an unsubsidized loan is one where the government isn't paying the interest while the borrower is in school.)When a borrower comes out of forbearance, a period when payments are not required is 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 update his or her income annually for certain income-driven repayment plans, including the Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plans.

The Biden administration has a plan to slow interest from adding to borrowers' federal student loan debt balances.

to a federal rule announced earlier this month would limit the number of ways interest adds to the principal balance — known as capitalization. The change could go into effect as early as next summer after a formal review process takes place.

Related video above: Student loan scammers targeting borrowers now more than ever

Federal student loans would still carry interest at a fixed rate that is set annually by law. The move wouldn't result in any cancellation of debt either. But the change could keep some student loan balances from spiraling upward, which can happen even when a borrower is making regular payments.

"This affects just about everybody," said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that offers free student loan advice to borrowers.

Throughout the pandemic, most federal student loan borrowers have been spared from interest accumulation thanks to the pause on payments that also froze interest. But this pandemic-related relief is set to expire after Aug. 31.

What is interest capitalization?

When unpaid interest is added to the principal (the amount lent on which interest is paid), it's known as interest capitalization. Generally, this happens whenever a loan moves from a non-repayment status to a payment status, Mayotte said.

Once capitalization occurs, future interest accrues on a higher amount, and sometimes the monthly payment amount.

This does not happen every day. Instead, the unpaid interest continues to grow separately until an event occurs that triggers capitalization.

Currently, there are several times when capitalization is triggered. For example, it happens when a borrower enters repayment after finishing school or at the end of a deferment or forbearance period when payments were temporarily postponed.

Here's a simplified example. A hypothetical $10,000 student loan accrues $1 a day in interest. After 30 days, there is a $10,000 principal balance and a $30day interest balance. On the next day, a capitalization event occurs. If no payment is made, the principal balance is now $10,030 and interest is now accruing by more than $1 a day, at an amount based on the interest rate and new principal.

What would Biden's proposal do?

The rule changes proposed by the Biden administration would limit the times when capitalization would occur. In some instances, capitalization is required by law and cannot be changed by the administration. One example is when a borrower's deferment period ends.

The new proposal aims to prevent interest capitalization when it's not required by statute. The changes would only apply to federal Direct Loans. Interest capitalization from the Federal Family Education Loan program, which ended in 2010, would remain the same.

Under the proposed rule, interest would no longer capitalize at these times:

When a borrower with an unsubsidized Direct Loan enters repayment for the first time, typically or otherwise leaving school. (Unlike a subsidized loan, an unsubsidized loan is one where the government isn't paying the interest while the borrower is in school.)
When a borrower comes out of , a period when payments are not required is often because a borrower is experiencing financial difficulties and requests relief.
When a borrower 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 update his or her income annually for certain, including the Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plans.

��vlog