What Can Increase Your Total Student Loan Balance?

When tackling student loans, many find themselves confused by the increase in their total student loan balance despite making regular payments. Knowing the drivers behind this balance hike matters more than ever. We’ll cover how interest accrual during deferment and forbearance, among other factors, can play a significant role.

Key takeaways

• Accrued interest can significantly increase your loan balance if not managed properly
• Periods of forbearance and deferment often allow interest to accrue, leading to balance hikes
• Consolidating loans may simplify payments but usually results in a higher total balance

What can increase your total student loan balance?

Several factors can contribute to an increased student loan balance. One primary cause is accrued interest.

Even if you're making regular payments, those payments might not be enough to cover the interest accruing over time. If that’s the case, any interest balance not covered by your payment will increase your overall loan balance.

What’s more, this interest might eventually capitalize, meaning that it gets added to your principal balance. This will make interest accrue faster in the future.

Capitalization can occur during different periods during your loan term, like after you graduate from school. Another significant driver is periods of forbearance or deferment.

Though these options provide short-term relief, they might allow interest to accumulate. Depending on the specific terms of your loan, interest may or may not accrue during these periods, so always read the fine print.

This unpaid interest then capitalizes once the deferment or forbearance period ends. This can lead to a situation where you owe more after the relief period than before.

Plus, consolidating loans can also increase your balance. That’s because consolidation usually extends the loan term, increasing the overall interest paid over time.

Also, any unpaid interest on original loans gets added to the new loan's principal. For a more detailed exploration of these options, check out our page on refinancing student loans.

Accrued interest

Interest on student loans accrues daily, which can sneak up on borrowers. Here’s how it affects borrowers:

• Interest begins accruing as soon as the loan is disbursed, although the government pays this interest while you’re at school for subsidized loans.
• For unsubsidized federal or private loans, interest accrues during in-school, deferment, and forbearance periods.
• Capitalization of unpaid interest increases the principal, causing you to pay interest on interest.

Forbearance and deferment

While these options offer temporary payment relief, they come with long-term costs:

• Interest usually accrues during these periods unless you have subsidized federal loans.
• Upon the end of forbearance or deferment, accumulated interest capitalizes, increasing your overall debt.

Consolidation pitfalls

Federal student loan consolidation can increase your balance:

• Extends the repayment period, leading to more interest over time.
• Unpaid interest on original loans capitalizes, increasing the new loan’s balance.

TuitionHero Tip

To better manage your loan balance and explore alternatives, consider visiting student loan advice.

How accrued interest affects loan balances

Interest accrues daily on all student loans, but the effect varies depending on the loan type and stage of repayment. When interest capitalizes (gets added to your principal balance), you end up paying interest on top of interest.

This phenomenon is a primary driver behind ballooning student loan balances. Federal student loans, particularly unsubsidized and PLUS loans, start accruing interest as soon as the funds are disbursed.

If you're still in school or in a deferment or forbearance period for an extended time, you're looking at a significant interest buildup. You can use a student loan calculator to understand the potential layout of your repayment plan.

Handling interest during in-school, deferment, and forbearance periods

For unsubsidized loans, accumulating interest during these periods is inevitable. Consider making monthly interest payments during school to keep this accrual in check, as showcased by the Graduate Student Loans options on our website.

In contrast, for subsidized federal loans, interest is covered by the government during in-school, deferment, and some forbearance periods. This means your balance won't increase due to interest accumulation. Making optional interest-only payments during deferment or forbearance can help keep your balance manageable.

Why consolidation can increase your balance

Federal student loan consolidation allows you to combine multiple loans into one, potentially simplifying your payments but at a cost. Here's how it can increase your total balance:

1. Extending the repayment term results in more interest paid over time.
2. Interest capitalization on unpaid interest from original loans, adding to the principal of the consolidated loan.

This extended repayment term might seem like a relief but, in reality, it causes you to pay significantly more in interest over the loan’s life. Don't forget to review all aspects of Income-Driven Repayment (IDR) plans and other similar repayment plans to understand their long-term effects.

Strategies to manage increasing balances

To combat increasing loan balances, consider these strategies:

• Refinancing for lower interest rates: If you have good credit and steady income, refinancing can usually reduce your interest rate, making the loan more affordable.
• Opting for the right repayment plan: Plans like the Income-Based Repayment (IBR) plan can provide lower monthly payments. However, understand the long-term cost implications.
• Voluntary interest payments: While in school or during deferment and forbearance periods, making interest-only payments can prevent balance increases.

Negative amortization in income-driven repayment plans

With income-driven repayment plans, it’s possible to make monthly payments that are too low to cover accruing interest. This remaining unpaid interest then adds to the loan's principal, creating a cycle of increasing debt.

Notably:

1. SAVE Plan: Erases leftover interest, preventing an increasing loan balance.
2. PAYE Plan: Government waives unpaid interest for up to three years on subsidized loans, but unpaid interest after three years will accrue.
3. ICR Plan: Unpaid interest carries over and accumulates until the debt is forgiven or paid off.

TuitionHero Tip

Review the terms of these plans carefully in our comprehensive guide to ensure you choose the best option for your financial situation.

Making the most of student loan benefits

Exploring all available options is critical for managing your student loan balance. For example, understanding loan forgiveness options can significantly relieve your debt burden. If you qualify, enrolling in student loan forgiveness programs can help you see a pathway to clearing your debt without the continuous struggle of growing balances.

Federal vs. private loan strategies

Managing federal and private loans requires different strategies. Federal loans offer more flexible repayment plans and potential for forgiveness, while private loans can sometimes provide better interest rates if you have good credit.

However, private loans lack income-driven repayment plans and forgiveness options. You are more likely to face increased balances due to interest capitalization in private loans.

For a tailored approach, check out Private Student Loans to understand the nuances and how to navigate them effectively. When dealing with student loans, recognize how varied strategies and loan types can affect your total balance.

To illustrate these points further, here’s a tailored data table summarizing key details about how different scenarios affect student loan balances:

Understanding these nuances can significantly affect how you manage and potentially minimize your student loan balance. For more insights and personalized advice, don't forget to explore our comprehensive strategies for managing student loan debt.

Dos and don'ts of managing student loan debt

When managing student loan debt, it’s crucial to understand what actions to take and what to avoid. Proper financial behavior can help reduce the total balance, while the wrong moves can cause your debt to balloon. Here’s a quick guide to navigate these waters effectively.

Advantages and disadvantages of student loan refinancing

Refinancing student loans can be a powerful tool to manage debt more efficiently, but it’s not without its pitfalls. Understanding the pros and cons can help you decide if it’s the right move for you.

Advantages of refinancing student loans

• Lower interest rates: You might save money by securing a better interest rate.
• Single monthly payment: Consolidate multiple loans into one, simplifying your payments.
• Flexible terms: Choose a repayment term that suits your financial situation.
• Potential for better credit score: Successfully managing a refinanced loan can improve your credit score.

Disadvantages of refinancing student loans

• Loss of federal loan benefits: Refinancing federal loans means giving up options like income-driven repayment plans and loan forgiveness.
• Credit requirements: You may need excellent credit to qualify for the best rates.
• Origination fees: Some lenders charge fees to refinance, which could negate the savings from a lower rate.
• Fixed vs. variable rates: While variable rates may start lower, they can increase over time, raising your monthly payments.

For more detailed guidance on these advantages and disadvantages, check our page on strategies for managing student loan debt. Understanding these factors will help you make an informed decision on whether refinancing is right for you.

Why trust TuitionHero

At TuitionHero, we help you manage student loans with resources on refinancing, forbearance, and deferment. Our tools identify the best repayment plans and connect you with loan forgiveness programs. We also assist with FAFSA, finding the right credit card, and securing scholarships. Let us help you keep your balance under control.

Frequently asked questions (FAQ)

What is the difference between deferment and forbearance?

Deferment and forbearance both allow you to temporarily postpone your student loan payments, but they differ in terms of interest accrual. During deferment, interest doesn’t accrue on subsidized federal loans, but it will accrue on unsubsidized loans. Forbearance, on the other hand, allows interest to accrue on all types of student loans, increasing your total balance over time.

Can refinancing my student loans help reduce my interest rate?

Yes, refinancing your student loans can potentially lower your interest rate, which can help you save money over time and reduce your total balance. By qualifying for a lower interest rate, your monthly payments could become more manageable, and you might pay less in interest over the life of the loan. Check out options for refinancing at TuitionHero.

How can I prevent my student loan balance from growing?

To prevent your student loan balance from growing, consider making interest-only payments during periods of deferment and forbearance, exploring refinancing options, and staying within repayment plans that minimize interest accrual. By keeping an eye on your interest rates and making proactive payments, you can better manage your debt and avoid unexpected balance increases. For more insights, visit our student loan management page.

Final thoughts

Effectively managing student loan debt involves understanding the various factors that can increase your balance and taking proactive steps to minimize these effects. Whether it's navigating accrued interest or exploring refinancing options, you have tools at your disposal to prevent a ballooning loan balance. For further advice and resources on managing your student loans and exploring repayment plans, visit our guide on using a student loan calculator to plan your finances.

Source

• Who Owns My Student Loans? - NerdWallet
• Who Owns My Student Loans? - Ramsey