Student loan borrowers could have up to $20,000 in interest forgiven as early as this fall—here's who qualifies

Student loan borrowers could be getting exciting news this fall.

Many student loan borrowers make payments on their loans for years without ever really putting a dent in them, due to interest that has accumulated and continues to grow.

In response, President Joe Biden is taking steps to help student loan borrowers curb what his administration calls “runaway interest.” As early as this fall, federal student loan borrowers could see excessive interest charges wiped off their debt, according to the Department of Education.

“More than 25 million borrowers owe more than they originally borrowed, including many who have made years of payments, due to the interest rates on Federal student loans,” the Biden administration said in a statement.

The move is part of a broader student debt forgiveness plan that will soon be open for public comment before going into effect. While the entirety of the plan may not be rolled out until 2025, the administration is hoping to initiate the interest forgiveness provision as early as this fall, James Kvaal, Under Secretary of Education, tells CNBC Make It.

“We’re starting with the interest benefits,” Kvaal says. “And then we’re going to implement the remainder of the plan as fast as we can.”

Here’s who may be eligible for forgiveness soon.

Borrowers could see $20,000 forgiven, potentially more

Under Biden’s new loan forgiveness plan, borrowers whose loan balances are larger than when they first entered repayment would be eligible to have up to $20,000 of that balance growth forgiven.

If your loan balance was $27,000 when you entered repayment, but is now at $34,000 due to accrued interest, you could see $7,000 of that balance canceled if the plan is enacted as currently written.

Low and middle-income borrowers on the Saving on a Valuable Education or other income-driven repayment plan could have even more of their balance growth canceled. Single borrowers enrolled in an IDR plan who earn $120,000 a year or less or married couples earning $240,000 or less would be eligible to have the entirety of their balance growth wiped out, according to the administration’s plan.

If enacted as proposed, borrowers won’t need to apply to get this interest relief, the administration says.

How student loan interest gets out of control

Roughly 25 million federal borrowers stand to benefit from Biden’s interest cancelation plan, with 23 million expected to have the entirety of their balance growth wiped out, the administration says.

While interest rates on student loans are relatively low, high loan balances coupled with certain payment plans and periods of forbearance have led to many borrowers seeing their loan balances continue to rise despite making regular payments.

On the standard repayment plan for federal student loans, minimum monthly payments account for any interest that accrues each month. This ensures borrowers who pay in full each month will eliminate the entirety of their loans at the end of the 10-year term.

But on certain payment plans, like income-driven repayment, a borrower’s minimum monthly payment may not cover interest. That means it will continue to accumulate and could even capitalize — which is when interest is added to the principal balance, so more interest accrues on top — if you change payment plans.

Interest may also accrue during any period when your loans are in deferment or forbearance. With unsubsidized loans, interest continues to accrue while your loans are in deferment and capitalizes when you resume making payments.

The accrued interest won’t capitalize on loans after a forbearance, but it will be added to any other unpaid interest and can extend your repayment period or increase your monthly payment. Just one year of forbearance on a $30,000 loan with a 6% interest rate would spell $1,800 in interest charges.

Want to make extra money outside of your day job? Sign up for CNBC’s new online course How to Earn Passive Income Online to learn about common passive income streams, tips to get started and real-life success stories. Register today and save 50% with discount code EARLYBIRD.

Plus, sign up for CNBC Make It’s newsletter to get tips and tricks for success at work, with money and in life.