5 factors that increase your total student loan balance

When you start making student loan payments, you might be surprised to find your balance has grown beyond your original loan’s principal amount. Factors like accruing interest, capitalization, and even the type of repayment plan you use can all contribute to rising student debt.

Staying informed about what increases your total loan balance can help you avoid it in the first place. Here's what to watch for. 

1. Interest accrual

Interest is the price you pay to borrow money, and it’s one of the most significant factors in the total cost of your loan. For most federal and private student loans, interest accrues on unpaid loan balances as soon as the funds are disbursed. If you don’t start making payments until after you leave school, your loan balance will be higher than the amount you originally borrowed.

Say you borrowed a $5,000 loan at a 6% interest rate for each year you attended school. If you didn’t start making payments until 6 months after graduation (which is the standard grace period), here’s what you’d pay over your loan’s lifetime:

Even though you only borrowed $20,000, you’ll owe more than $23,000 by the time you make your first payment. And as interest continues to accrue over 10 years of repayment, you’ll end up paying nearly $11,000 in total interest.

2. Interest capitalization

Interest regularly accrues on your student loan, but it can also capitalize in certain instances. When capitalization occurs, any unpaid interest is added to your loan’s principal balance. Interest will then accrue on this new, larger balance — and you essentially start paying interest on your unpaid interest.

Exactly when interest capitalizes depends on your loan and lender, but it commonly happens after certain triggering events. For most federal loans, interest capitalizes when you:

• Resume payments after pausing your loans due to economic hardship, military service, or other qualified reason
• Leave an income-driven repayment plan

An exception to this is Direct Subsidized Loans, for which the government pays the interest that accrues while you’re enrolled in school and during a six-month grace period thereafter. When you start repayment on that loan, you won’t have capitalized interest tacked onto your principal balance because it was already paid for.

3. Your repayment plan

Altering your repayment plan can make your monthly payment more manageable. However, plans that lower your monthly payment or extend your term can result in a higher loan balance overall.

You might see this if you’re enrolled in a federal income-driven repayment (IDR) plan, which reduces your monthly payments based on a percentage of your income. For example, say you enrolled in an IDR plan with a monthly payment of $50. However, for this period, a $60 interest charge was applied based on the unpaid total balance.

Since your payment doesn’t cover all your accrued interest, this repayment plan results in $10 of interest charges remaining on the account. In this case, your loan’s balance can grow, even though you’re making regular payments each month.

4. Fees

It’s common for lenders to charge fees, and sometimes these are added to your loan’s balance. While student loan lenders can’t charge you prepayment penalties for paying off your loan early, they can charge other types of fees that can make your loan balance rise.

• Origination fees: Some lenders charge this fee when the money is sent to you. Origination fees don’t increase your loan balance, because they’re typically deducted upfront when loans are disbursed. However, you may have to borrow more to cover this fee, and you’ll still pay interest on the amount you’re charged.
• Late fees: This is a flat fee or percentage that’s charged when you don’t pay by the due date. These are typically about 5% of your missed payment amount.
• Insufficient funds fees: When the account you’re making a payment from doesn’t have enough money to cover the amount due, some lenders charge a returned payment fee. Typically, it’s a flat fee.
• Collection fees: If you default on your federal or private student loans, the debt might be assigned to a collection agency. The agency can impose hefty collection fees that are added to the unpaid loan balance.

5. Deferment, forbearance, and grace periods

During periods of nonpayment, such as deferment, forbearance, or your grace period, your loans will typically continue to accrue interest. Private student lenders may also charge you a flat fee to temporarily pause your loans.

While pausing your payments may be necessary in a tight financial spot, your loan balance will likely grow during this time and you’ll owe more than you did before.

How to avoid increases to your total loan balance

Although you might not always be able to avoid increases to your loan balance, there are strategies to minimize the effect:

Make interest-only payments while in school or deferment

If you have unsubsidized federal or private student loans, you can avoid capitalized interest on your loan balance by making interest-only payments while your loan payments are paused. If you pay off the interest while your loan is deferred, it won’t be added to your principal balance when it’s time to make regular payments.

Change your repayment plan

Calculate whether your current repayment plan is costing you. Your payment might be too low, resulting in unpaid interest each month. Or perhaps you have an unnecessarily long loan term, keeping you in debt for longer and costing you more in interest.

The Federal Student Aid loan simulator can help you compare the costs and potential savings of different plans. Or you can use a student loan calculator to see how much interest you’ll pay overall.

However, you might find that the benefits of your existing plan are worth a growing loan balance. For example, if you’re pursuing Public Service Loan Forgiveness, a higher loan balance may not matter since the remaining amount can be forgiven after you complete the required payments.

But if you’re not seeking loan forgiveness and your financial situation has improved since you last evaluated your repayment strategy, explore whether another plan can lower your loan costs by paying off your debt faster.

Take advantage of interest rate discounts

Most lenders offer interest rate discounts to incentivize borrowers to enroll in automatic payments. This helps lenders secure payments in a timely manner, and borrowers typically receive a nominal rate discount of 0.25 percentage points.

Although it doesn’t look like much, over your loan term this discount can result in significant savings.

Make extra payments

If you have some spare cash and can afford to make extra payments, doing so lowers your loan balance faster and you’ll incur less interest overall.

When making extra payments, ask your lender to apply 100% of the added cash toward your principal balance. This way, it isn’t applied to the next cycle’s accrued interest or fees and can lower your balance faster.

Refinance your loans

When you refinance student loans, a private lender agrees to pay off your original loan balance and creates a new loan in its place. This strategy is useful if the new lender offers a better interest rate, lower monthly payment, or other perks. And depending on the terms of your old and new loans, it can offer thousands of dollars in savings.

Refinancing private student loans comes with relatively few trade-offs, but carefully consider before refinancing federal loans. You’ll lose access to government programs and protections, including IDR plans, loan forgiveness opportunities, and more flexible deferment and forbearance. Refinancing is not reversible, so make sure you won’t need those federal perks before taking action.