Short sale proceeds sit with the lender as collateral and earn interest. The lender returns most of that interest to the short seller as the rebate, keeping a spread that represents the borrow fee.
If the market rate is 5% and the borrow fee is 0.5%, the rebate is about 4.5% and the short seller earns it. If the borrow fee is 8%, the rebate is negative 3% and the short seller pays that rate on the position.
The rebate is why short positions are not free to hold and why the economics change completely with the level of interest rates. In a zero-rate environment shorting cost the borrow fee outright; at 5% short rates, general collateral shorts earn a meaningful carry. See stock-loan-fee.
Related: stock-loan-fee, securities-lending, hard-to-borrow, short-selling, federal-funds-rate, carry-trade