If you’ve been making your student loan payments, yet your balance isn’t budging — or even worse, it’s gone up — you may be asking yourself, why did my student loan balance increase? The likely reason is that your monthly payments are not covering all the interest that has accrued, which may be a result of the payment plan you’re on.
Understanding how and when student loans accrue interest, and the role your repayment plan may play, can help you make smart choices about paying off your balance.
Table of Contents
- What Makes Up a Student Loan Balance?
- The Impact of Interest Accrual
- How Do Payments Affect My Student Loan Principal?
- How Does an Income-Based Repayment Plan Affect My Student Loan Balance?
- Forbearance and Deferment Periods
- How to Pay Down Your Loan Quicker
- Other Strategies to Reduce Your Student Loan Balance
Key Points
• Accrued interest can cause student loan balances to remain stagnant or grow. Federal student loans accrue interest daily.
• At the beginning of the loan repayment term, larger portions of payments primarily cover interest rather than the principal. Over time, the portion reducing the principal increases as the interest portion decreases.
• Income-driven repayment plans can lower monthly student loan payments, but they may be too low to fully cover the interest, which can potentially cause the loan balance to grow.
• During a period of forbearance or deferment, interest continues to accrue on student loans, and on certain types of loans, the interest may capitalize.
• Potential methods to reduce student loan balance include changing repayment plans, making extra payments toward the loan principal, and student loan refinancing.
What Makes Up a Student Loan Balance?
To understand what increases your total loan balance, it’s important to know how student loans work. Your student loan balance is made up of two parts: the amount you borrowed plus any origination fees (the principal) and what the lender charges you to borrow it (interest).
Once you receive your loan, interest begins to accrue. If it’s a Direct Subsidized loan, the federal government typically pays the interest while you’re in school and for the first six months after you graduate. After that, you are responsible for paying the interest along with the principal.
If the loan is a Direct Unsubsidized loan or a private student loan, the borrower is solely responsible for accrued interest, even while they’re in school.
The Impact of Interest Accrual
The interest rate on your student loan is calculated as a percentage of your unpaid principal amount. Most federal student loans accrue interest daily. To determine the amount of interest that accrues each day, multiply your loan balance by the number of days since your last payment and then multiply that number by your interest rate.
In some cases, unpaid interest on federal student loans can capitalize — such as after a deferment for a Direct Unsubsidized loan. That means the interest is added to your principal balance. Interest then accrues on the new, larger balance moving forward, which increases how much you owe.
How Do Payments Affect My Student Loan Principal?
Many student loan borrowers pay a fixed monthly payment to their lender. That payment includes the principal and the interest. At the beginning of a loan term, a larger portion of your payment goes toward paying interest, and a smaller portion goes to the principal. But the ratio of interest to principal gradually changes so that by the end of the loan term, your payment is mostly going toward the principal.
How Does an Income-Based Repayment Plan Affect My Student Loan Balance?
The payment process is different if you’re making payments under an income-driven repayment (IDR) plan. Under these plans, your payments are tied to your family size and discretionary income. The interest, however, doesn’t change based on your income.
While an IDR plan can lower your monthly payments, the payment amount might be too low to fully cover the interest that accrues for that month, much less contribute to your principal. In fact, your student loan balance may actually grow over time, despite the payments you’re making, and you could end up repaying significantly more than you borrowed originally.
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Forbearance and Deferment Periods
Borrowers can temporarily pause their federal student loans payments with a forbearance or deferment.
A student loan forbearance allows you to pause your payments for up to 12 months at a time. However, interest continues to accrue on your federal loans while you’re in forbearance. To qualify for a forbearance, you need to apply for it and demonstrate that you meet specific requirements, such as experiencing financial difficulties or facing medical bills. Your loan servicer will determine if you are eligible.
With a student loan deferment, you can temporarily pause the payments on your federal loans, but you must apply for a specific type of deferment and meet certain requirements to be eligible. The types of deferment include cancer treatment deferment, economic hardship deferment, and unemployment deferment, among others.
Interest accrues on your loans during deferment, and you may be responsible for paying it, depending on the type of loan you hold. For example, borrowers with Direct Unsubsidized loans, Direct PLUS loans, and Federal Family Education Loans (FFEL) typically need to pay the interest that accrues on these loans while in deferment. You can pay the interest as it accrues or not. However, if you don’t pay it, the interest will capitalize at the end of the deferment period, which means the total amount you pay over the life of the loan might be higher.
Private student loans may or may not allow forbearance or deferment, and the rules typically differ from lender to lender.
How to Pay Down Your Loan Quicker
When it comes to repaying student loans, the key is to find an approach you’ll stick with. One way to tackle the debt is by making extra payments toward the principal. Even a little bit can help bring down the loan balance.
Another approach is to consider a student loan refinance to a lower interest rate, if you qualify, or you could refinance to a shorter loan term. You could also potentially do both. Your payments may be higher, particularly if you switch to a shorter loan term, but you will be finished paying off the debt sooner.
Note that if you refinance a federal student loan, you will lose access to federal protections and programs such as the Public Service Loan Forgiveness program, and income-driven repayment plans.
Other Strategies to Reduce Your Student Loan Balance
There are additional methods you can use to help pay off your student loans. They may take longer than the approaches listed above, but they can help shrink your balance.
• Switch to a different repayment plan. If you’re on an income-driven plan, you could change to the standard repayment plan instead. Your monthly payments will likely be higher on this plan, but that will typically reduce the total amount of interest you’ll pay. Plus, you’ll repay your loan in up to 10 years, rather than the 20 or 25 years on an IDR plan.
• Enroll in autopay. When you sign up for automatic payment, your loan servicer will deduct the amount you owe from your bank account each month. You won’t have to remember to make your payments, and even better, if you have federal Direct loans you’ll get a 0.25% interest rate deduction for participating. Some private student loan lenders also offer a similar interest rate deduction for autopay.
• Search for student loan repayment assistance or forgiveness options. The federal government, many states, and various organizations offer programs that help qualifying individuals in certain professions pay off their loans. This includes teachers, health-care professionals, members of the military, and those who work in public service. Do some research to see what programs you might be eligible for.
The Takeaway
The way loan payment schedules are set up is likely one reason why your regular payments don’t seem to be making much of a dent to your balance or loan principal. Initially, more of your payment goes toward paying interest and less goes toward the principal. But gradually that changes so that by the end of the loan term, most of your payment is going toward the principal.
In addition, the type of student loan repayment plan you’re on can increase the amount you owe. With an income-driven plan, your monthly payment may be low enough that it doesn’t cover the interest you owe, which could cause your loan balance to grow.
Fortunately, you have options to help pay off your loan faster or pay less interest over the life of the loan. For instance, you could switch to a different repayment plan, make extra payments toward your loan principal, or refinance your student loans.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
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