What Increases Your Total Student Loan Balance?

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Stanley Tate

#1 Student Loan Lawyer

Updated on October 6, 2022

Like credit cards, mortgages, and other types of loans, student loan lenders charge interest when you borrow money. Pay your bills on time and for the full amount due, and your student loan balance will decrease — unless you make payments based on your income. But if you miss a payment, pause your loans temporarily with forbearance or deferment, or pay less than the interest charged each month, your total loan balance can (and will!)  increase exponentially.

Keep reading to learn what increases your total student loan balance and how you can avoid the fate of ballooning student loan debt.

What causes your student loan balance to increase?

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?

How to get an amortized student loan repayment plan

A fully amortized repayment plan ensures that your student loan will be paid off at the end of the repayment period. Knowing your student loan payment period is tricky because your term can change. For example, if you consolidate your loans after leaving school, your payment period can extend from 10 years to 30 years, depending on your loan balance. Or, if you switch from the Standard Repayment Plan to an income-driven plan, your term will grow from 10 years to 20-25 years.

You can get an amortized payment schedule from your federal student loan servicer by switching to one of these four plans:

  • The Standard Repayment Plan — pays off your debt in 10 years or up to 30 years if you consolidate.

  • The Extended Plan —  pays off your debt in 25 years.

  • The Graduated Plan —  pays off your debt in 10 years or up to 30 years if you consolidate.

  • The Income-Sensitive Plan* — pays off your debt in 15 years.

Only Federal Family Education Loans are eligible for this plan.

Warning: Switching from an income-driven repayment plan to another plan will cause the interest to capitalize, which means it will be added to the principal balance. Read more about interest capitalization and student loan debt.

Learn More: Buying a House With $100k in Student Loans

How to reduce the interest you pay on student loan debt

Here are six ways to cut your interest costs:

  • Make interest payments while in school. Making payments towards your loans while the loans are in a deferment period can save you money in the long run.

  • Make extra payments. Paying more money when you can helps you get out of debt faster and save you money on interest. To get the full benefit, tell your servicer which loan to apply the extra money and that you want the funds applied to your principal only.

  • Switch to the REPAYE plan. If you’re in an income-driven repayment plan but don’t plan to stick around two decades for loan forgiveness, switching to the Revised Pay As You Earn Plan can cut the interest that grows on your account by half through its interest subsidy.

  • Refinance your student loans. Student loan refinancing can help you score a lower interest rate, saving you money on the total interest charges. You‘ll get the best rates with a blemish-free credit report, a credit score in the 700s, and enough income to cover your expenses and student loan payments. Use Credible to shop for the best student loan interest rates and terms.*

  • Enroll in autopay. Many student loan servicers and private lenders offer interest rate discounts (usually .025%) if you enroll in autopay, open a checking account, or pay on time for a set period.

  • Claim student loan interest on your tax return. Depending on your income and tax filing status, you may claim up to $2,500 of the student loan interest you paid in the past year. Use those savings to pay down your student loans faster.

*Refinancing may not be the best solution for federal student loans as you can lose access to federal student loan benefits such as income-driven repayment with forgiveness after 20 to 25 years and PSLF forgiveness. 

Consolidating federal loans can help you qualify for Public Service Loan Forgiveness and the new IDR adjustment, but it won’t lower your rate. The consolidation loan will have a fixed interest rate based on the weighted average of your previous rates. You can consolidate your existing loans into a Direct Loan for free on the Federal Student Aid website, studentaid.gov.

Learn More: Who Do You Contact if You Have Questions About Repayment Plans?

Bottom Line

Interest on student loans can accumulate quickly, so it’s important to pay them down. But even if you fall behind, there are ways to get back on track. By understanding how interest works and what increases your total loan balance, you can put a strategy in place to keep that number low.

Ready for help? Schedule a call so we can work together to find a plan that fits your budget and helps you pay off your student loans faster.

UP NEXT: What Repayment Plans Qualify for PSLF?

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