Trump Administration To Charge Interest On Student Loan In SAVE Plan

The Trump administration is set to start charging interest on student loans that are currently in the SAVE plan forbearance, contradicting months of assurances made to borrowers. Interest accrual will begin in August, and is expected to impact eight million student loan borrowers.

The abrupt policy shift, first reported today by Politico, comes as the federal student loan system faces unprecedented upheaval. The Department of Education faces massive operational challenges following layoffs and buyouts that reduced its workforce by nearly 50%, contributing to growing backlogs of applications for borrowers applying for income-driven repayment plans or requesting student loan forgiveness. Last week, President Trump signed legislation passed by Republican lawmakers in Congress that will repeal several popular affordable repayment plans and raise the monthly payments for millions of borrowers. And this summer, the department is expected to begin garnishing the wages for more than five million borrowers who are in default on their student loans.

Advocacy groups slammed the Trump administration, arguing that charging SAVE plan borrowers interest will burden them with additional costs.

“Instead of fixing the broken student loan system, Secretary McMahon is choosing to drown millions of people in unnecessary interest charges and blaming unrelated court cases for her own mismanagement,” said Student Borrower Protection Center executive director Mike Pierce in a statement on Wednesday. “Every day, we hear from borrowers waiting on hold with their servicer for hours, begging the government to let them out of this forbearance, and help them get back on track—instead, McMahon is choosing to jack up the cost of their student debt without giving them a way out. These are teachers, nurses, and retail workers who trusted the government’s word, only to get sucker-punched by bills that will now cost them hundreds more every month. McMahon is turning a lifeline into a trap and fueling one of the biggest wealth grabs from working families in modern history. It’s a betrayal.”

Here’s what student loan borrowers need to know.

SAVE Plan Forbearance Had Paused Student Loan Payments And Interest

More than eight million borrowers had enrolled in the SAVE plan by last year, or were automatically converted to SAVE from its predecessor plan, REPAYE. The SAVE plan is one of several student loan repayment plan options that allow borrowers make payments based on their income, with any remaining balance eligible for loan forgiveness after years in repayment (typically 20 or 25 years).

However, a group of Republican-led states then filed a legal challenge against the Biden administration to block the program, arguing it was too generous and exceeded what Congress had authorized when it first passed a law allowing for the creation of income-driven repayment plans more than three decades earlier. Last summer, a federal appeals court issued an injunction blocking the SAVE plan. This forced millions of borrowers into an involuntary forbearance while the litigation continued. During the forbearance, borrowers have not been required to make payments, and interest has not been accruing on their balances. But the time spent in the forbearance has not counted toward student loan forgiveness – both on the 20- or 25-year IDR repayment terms, and also for Public Service Loan Forgiveness.

“ED has placed borrowers currently enrolled in the SAVE Plan (previously known as the Revised Pay As You Earn, or REPAYE, Plan) into a general forbearance because their servicers are not currently able to bill them at the amount required by a recent court order,” says Department of Education guidance. “Interest will not accrue under this forbearance, which will last until the legal situation changes or servicers are able to send bills to borrowers at the appropriate monthly amount. Furthermore, time spent in this general forbearance will not count for PSLF or IDR forgiveness.”

The forbearance has continued for the last year. And despite misleading correspondence recently sent to borrowers by some student loan servicers contracted with the department, officials have confirmed that no interest should be accruing on loans that are in the SAVE plan forbearance.

Student Loan Interest Expected To Resume In August

But according to Politico, the Department of Education plans to resume charging student loan interest for borrowers who are in the SAVE plan forbearance. According to the reporting, the department is suggesting that charging interest is required under an updated, expanded injunction issued by the federal appeals court earlier this year. But nothing in that injunction expressly requires the department to resume charging interest on covered federal student loans.

“Despite representations by the U.S. Department of Education (the Department) to the contrary, no federal or state court—including 8th Circuit Court of Appeals—has issued an order instructing the Department to resume charging these borrowers interest or calling into question the Secretary’s authority to waive interest accrual for borrowers whose payments have been suspended,” said the Student Borrower Protection Center in a memorandum released on Wednesday.

Furthermore, the abrupt resumption of interest appears to contradict guidance and prior assurances the department has provided to student loan borrowers over the course of the last 12 months – particularly that interest won’t accrue “until the legal situation changes or servicers are able to send bills to borrowers at the appropriate monthly amount.” The legal situation has not changed, and student loan servicers are not able to bill borrowers under the SAVE plan given that the repayment formula is enjoined.

The SBPC warned that resuming interest charges will cause substantial harm to student loan borrowers.

“The Student Borrower Protection Center estimates that a typical borrower affected by this Trump Administration policy change will incur more than $3,500 in unnecessary interest charges per year or roughly $300 per month,” said the group.

What Student Loan Borrowers Can Do

Student loan borrowers who are in the SAVE plan forbearance can apply to change to a different income-driven repayment plan. The Department of Education has resumed processing applications for the ICR, IBR, and PAYE plans. However, the department and its contracted loan servicers are contending with major application backlogs, exacerbated by the Trump administration’s decision to shut down the entire IDR application system for several months earlier this year in response to the February court order in the SAVE plan litigation. As of last month, the department still had a backlog of 1.5 million applications, with many student loan borrowers having applied months earlier with no progress on their requests.

The department also appears to be suffering from deepening operational problems that are impacting IDR plans as well as the related Public Service Loan Forgiveness, or PSLF, program. The Trump administration removed an IDR tracking feature earlier this year that allowed borrowers to monitor their student loan forgiveness progress under IDR plans, and appears to have halted IDR payment count updates as well as student loan forgiveness under the IBR plan, which is not required under any current court order. The administration also appears to have stopped updating PSLF payment counts for many borrowers, as well.

The passage last week of President Trump’s “Big, Beautiful Bill” adds additional complications to the student loan system. That legislation formally repeals the SAVE, PAYE, and ICR plans, which will force borrowers enrolled in those plans to eventually switch to either IBR (which could result in higher monthly payments), or the new Repayment Assistance Plan, or RAP, which could keep borrowers in debt for up to 30 years. Technically, borrowers appear to still be able to select PAYE and ICR on their IDR applications, but these borrowers will likely have to change their repayment plans again, possibly as soon as next year, as a result of the new legal changes impacting student loans.