Federal and private student loans are like any debt you finance: the longer you take to pay, the more interest piles up, and the more you eventually pay. But student loans also have unique qualities that make it more common for people to owe much more than they borrowed despite making payments for years.
Roughly 10% of all student loan borrowers saw their debt quadruple a decade after they left school, according to a recent analysis by economist Marshall Steinbaum. There are three reasons your student loan balance can increase — yes, even if you’ve been faithfully paying for years!
First, interest accrues daily, starting the day the loans are disbursed. If you have a subsidized loan, the federal government will pay your interest while your loans are deferred. But if you have an unsubsidized loan, you will be responsible for the interest over the life of the loan. Read more about subsidized vs. unsubsidized student loans.
Second, the unpaid interest is capitalized, which means it’s added to the principal amount when you pause monthly payments with deferment or forbearance, while your loans are in a grace period, or you switch plans. In other words, you’ll pay interest on the interest that accrues. Read more about capitalized interest on student loans.
Finally, the total amount you owe will increase when your monthly loan payments aren’t enough to cover your interest. This is called negative amortization. Many federal student loan borrowers in an income-driven repayment plan like IBR will eventually owe more than they borrowed because their payment amounts are much less than the daily interest. Thankfully, the U.S. Department of Education will write off the remaining balance after 20 to 25 years of payments. Read more about IDR forgiveness.
Learn More: Why Are Student Loans So High?