Borrowers Receive Misleading Student Loan Interest Notices — Here’s What To Know

Hundreds of thousands of federal student loan borrowers received a formal notice this week warning them that interest is accruing on their balance, and suggesting that they make a payment. But for many of these borrowers, interest isn’t actually accruing, and the notice provided misleading information.

The federal student loan repayment system remains plagued by dysfunction, making the environment ripe for confusion and misinformation. More than eight million borrowers who had enrolled in the SAVE plan remain stuck in a forbearance after a court blocked the program last summer. The ruling came in response to a legal challenge brought by Republican-led states. Meanwhile, the Department of Education and its contracted loan servicers are trying to work through a two-million application backlog for income-driven repayment plans after the Trump administration shut down the system earlier this year following a new court order related to the SAVE plan litigation. Then, last month, Republican lawmakers pushed legislation through the House to reshape the federal student loan repayment system, although no legal changes are in effect quite yet.

Here’s the latest, and what borrowers should know about student loan interest accrual during these turbulent times.

Student Loan Interest Should Not Be Accruing During The SAVE Plan Forbearance

At least eight million federal student loan borrowers who had been enrolled in the SAVE plan are currently in a forbearance. A federal appeals court issued an injunction last summer blocking the program after a group of Republican state attorneys general filed a legal challenge, arguing that the Biden administration exceeded its authority by crafting a student loan repayment plan with such generous terms. The court blocked, but did not strike down, the SAVE plan, as the challenge continues. As a result, SAVE plan borrowers were put into a forbearance.

The SAVE plan forbearance period does not count toward student loan forgiveness for both IDR purposes or for Public Service Loan Forgiveness, or PSLF. But borrowers don’t have to make payments during the forbearance, and interest should not be accruing.

“You are in a general forbearance,” the Department of Education tells SAVE plan borrowers on its website, “because your loan servicer is not currently able to bill you at an amount required by the court injunction. You will be in this forbearance until servicers are able to accurately calculate monthly payment amounts or the court reaches a decision on the availability of the SAVE Plan.”

The department’s guidance indicates that during this general forbearance, “You do not have to make your monthly payments on your student loans, interest is not accruing, and time spent does not provide credit toward Public Service Loan Forgiveness (PSLF) or IDR.”

Student Loan Borrowers Receive Misleading Notice About Interest Accrual During Forbearance

This week, millions of federal student loan borrowers who are in the SAVE plan forbearance received a notice from their loan servicer, MOHELA, telling them that interest is accruing on their loans.

“In an effort to keep you updated on your federal loan(s), we have enclosed details about your loans), including the accrued interest, interest rate, and total balance,” reads the notice. “The loan(s) listed in this letter are currently in forbearance. Although no payments are due at this time, interest continues to accrue on your loan(s) during the forbearance period. You have the option to pay the interest during forbearance.”

But for many of these borrowers, interest should not be accruing, and this mass notice provided misleading information, suggesting that borrowers should make payments on their student loans when no payment is due and no interest is accruing. Borrowers still in the SAVE plan forbearance can look to the second page of the letter, which should indicate that the interest rate for the covered loans is 0%, and no interest has accrued so far this year.

After the notices were sent to borrowers, MOHELA issued a statement on its website clarifying the situation.

“If you recently received an interest notice for your student loan account, please know that this is not a bill, and no action is necessary at this time,” said MOHELA. “For borrowers on the SAVE administrative forbearance, interest is currently set at 0%. Refer to your loan details in your notice.”

Some borrowers in the SAVE plan forbearance are reporting that interest actually is accruing on their student loan balances. These borrowers are reportedly being told by their loan servicer that this is a mistake, and that the Department of Education should correct the error when the SAVE plan forbearance ends, likely later this year or sometime next year. However, some borrowers may be understandably concerned about this.

If you’re in the SAVE plan forbearance and not sure whether interest is accruing on your student loans, there are a few things you can do:

• Take screenshots of your balance via your online account with your student loan servicer or at StudentAid.gov. Then, log back in after 30 days and take another screenshot, and compare the figures.
• View your loan details via your online student loan servicer account and see if the current interest rate is set to 0%.
• Download your aid data from StudentAid.gov (you can do this by logging in via a desktop or laptop computer, clicking the “View Details” button on the “My Aid” box, and then clicking the “Download My Aid Data”). Look at the “Loan Actual Interest Rate” line for each individual loan account in the file to verify that it is set to 0%.

Interest Accrues On A Student Loan During Other Forbearance Periods

Federal student loan borrowers should be aware that while the SAVE plan forbearance halts interest accrual, interest will continue to accrue on balances during most other forbearance periods.

“If you get a forbearance, you’re still responsible for the interest that accrues while you’re not making payments,” says general Department of Education guidance on forbearance periods.

Importantly, this includes “processing” forbearances, where a loan servicer places borrowers in forbearance if a student loan repayment application (such as for an IDR plan) takes longer than a couple of weeks to complete.

“Servicers may place borrowers into a different forbearance category, known as processing forbearance, if the servicers need additional time to process those borrowers’ applications to enroll in IDR, recalculate their payments on an IDR plan, or recertify their incomes for their IDR plan,” says the Department of Education. “In contrast to the general forbearance for borrowers enrolled in SAVE (previously known as REPAYE), interest will accrue while a borrower is in processing forbearance. Additionally, time spent in processing forbearance (up to 60 days) is eligible for PSLF credit. Processing forbearance will last no longer than 60 days.” After that, borrowers may return to a general forbearance.

Federal student loan borrowers should be aware that it is no longer possible to apply for the SAVE plan following the most recent court ruling earlier this year. This means that borrowers who aren’t already in the SAVE plan forbearance cannot enroll, and therefore cannot benefit from the zero interest accrual feature. Borrowers can still apply for other IDR plans, but interest will continue to accrue during any associated processing forbearance.