Student loan deferments and forbearances are granted under many different scenarios. In most, however, interest on the loan continues to capitalize even during the time when the student loan borrower is not making payments under an approved agreement.
Borrowers enrolled in income-based repayment plans often make monthly payments that are not large enough to cover all of the interest that has accrued during the period, which also leads to interest capitalization.
Now, proposals have been floated to end interest capitalization under certain situations, including when borrowers resume repayment. The new rule, if adopted, would apply prospectively only, instead of providing retroactive relief.
We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about ending interest capitalization on student loans in certain circumstances.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: The current rules are patently unfair to student borrowers, who continue to accrue interest in a period of deferment or forbearance. We allow borrowers leeway in repaying student loans in extreme circumstances, such as when the borrower has lost their job and is unable to make payments.
The current interest capitalization rules punish borrowers for taking advantage of legitimate deferral programs.
