Written on: 31/8/2023
We wrote about the benefits of the SAVE program here. There was one major thing we left out, the treatment on interest capitalization. First, what is interest capitalization? Once we know that, we can see how the SAVE plan benefits current and future borrowers.
Capitalization is the addition of unpaid interest to the outstanding principal balance of a loan. (Bold emphasis added – smilingdad) When your unpaid interest capitalizes, it increases the outstanding principal amount due on your loan. Then your interest is recalculated based on that higher principal balance, increasing the overall cost of your loan. And depending on your repayment plan, capitalization may also cause your monthly payment amount to increase.
Nelnet.com Interest Capitalization (2)
Interest capitalization is an insidious process that increases your loan balance if your payment is not enough to cover the accrued interest. It is common for deferments related to U.S. Department of Education student loans. It’s how you can owe more over time than what you started with.
How the SAVE plan changes interest capitalization
The Washington Post had a great article on how the SAVE repayment plan changes interest capitalization. Gift link (3) provided here.
The Education Department will not charge any monthly interest not covered by the borrower’s payment. This means borrowers who pay what they owe on the SAVE plan — even if it’s zero dollars every month — will not see their loan balances grow because of unpaid interest.
Don’t miss this point about SAVE: The plan eliminates 100 percent of the remaining interest for subsidized and unsubsidized loans after a scheduled payment is made.
Michelle Singletary, Washington Post (3)
To see your balance not grow from interest capitalization is amazing relief. We will urge our children not to refinance their student loans if they get federal aid, because private student loans will not have this feature. We will encourage them to use the SAVE plan for as long as it is available to give them flexibility in the future. This is a life changing feature for the SAVE repayment plan as opposed to other plans.
If you have questions on affording your new student loan payments, Michelle has good advice.
If you have a federal loan and are concerned about affording your payments, find out whether you qualify for the SAVE plan. And do it now.
You can sign up at studentaid.gov/SAVE. The Education Department is hosting a free webinar on Sept. 14 from 7 p.m. to 8 p.m. Eastern time. There will be an opportunity to ask questions. Go to Eventbrite.com and search for “Repayment 101: Get Help with Your Federal Student Loans.”
Michelle Singletary, Washington Post (3)
Let’s work on a better world, step by step.
Sincerely yours,
smilingdad
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Notes:
(1) smilingdad Finance: The new SAVE student loan plan can help millions https://smilingdad.blog/2023/08/26/finance-the-new-save-student-loan-plan-can-help-millions/
(2) nelnet.com Interest Capitalization https://nelnet.com/interest-capitalization
(3) Washington Post Why Biden’s new SAVE student loan income-driven plan is a game changer https://wapo.st/45TozDZ
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