Table of Contents
Key Points
• Interest accrual can contribute to an increase in the total student loan balance over time.
• Unpaid interest can capitalize, adding to the principal balance and causing borrowers to pay interest on top of interest.
• Periods of deferment or forbearance often lead to loan balance growth due to interest accumulation.
• Late or missed payments can incur fees and penalties, increasing the total amount owed.
• Opting for a longer repayment term can reduce monthly payments but typically increases the total interest paid over the life of the loan.
If you have student loans, you may sometimes see the total loan balance go up, due to such factors as the interest you owe, your repayment term, or loan fees.
Whether your student loans are in a period of deferment or you’ve working to make payments every month, it can be frustrating to see your balance increase instead of go down.
To discover why this happens and what to do about it, read on. You’ll learn what increases your total loan balance, ways to reduce it, and repayment options that may help.
Understanding Loan Balances
The way student loans work is that when you first take out a loan for your education, your loan balance is the amount you borrowed. However, that loan balance can increase or decrease depending on your payments, interest charges, and fees.
Principal vs. Interest Explained
A student loan typically consists of principal plus interest. The loan principal is the amount you originally borrowed. If you took out a $25,000 student loan to pay for school, your principal amount is $25,000.
Interest is the cost of borrowing money, and it is part of what you owe on your student loan balance. Federal Direct loans for undergraduates disbursed on or after July 1, 2025 and before July 1, 2026, have fixed interest rates of 6.39%, while Direct Unsubsidized Loans for graduate or professional students have a fixed rate of 7.94%. Direct PLUS loans for parents and graduates and professional students have a rate of 8.94%.
The rates on private student loans vary, but as of December 2025, they ranged from 3.18% to 15.99% or more, depending on such factors as your credit and the lender you choose. Private student loan rates may be fixed or variable. If your rates are variable, meaning they fluctuate with market conditions, it can be quite challenging to predict exactly how your loan balance will change over time.
When you sign into your student loan account, your loan balance is the total amount you currently owe on your loan.
Recommended: Student Loan APR vs. Interest Rate
Capitalization of Interest and How It Works
In some circumstances, unpaid interest on your loan capitalizes, or gets added onto, your principal balance. Then you end up paying interest on top of interest, which is what increases your total loan balance — and potentially your monthly payment as well.
Here’s how capitalization works: Interest accrues on your student loans even at times you’re not responsible for paying it, such as the six-month grace period after graduation or during student loan deferment. If you have unsubsidized Direct loans or Direct PLUS loans, the unpaid interest that accrued during these times is added to your loan principle. The principle is then higher and you pay interest on the new larger amount.
Factors that Contribute to Increased Loan Balances
Whether you’re in a period of deferment or active repayment, you probably don’t expect your student loan balance to be increasing over time. Unfortunately, there are various circumstances that can cause your federal student loan balance to increase, such as the ones below.
Accrued Interest
Most loans, with the exception of Direct Subsidized Loans, start accruing interest immediately from the date of disbursement. If you borrowed as a freshman in college and deferred payments the entire time you were in school and for the six-month grace period after graduation, your loan balance could significantly increase after four and a half years of nonpayment.
Loan Forbearance or Deferment
It’s possible to temporarily postpone payments through student loan deferment or forbearance if you go back to school, encounter financial hardship, or have another qualifying reason. Most loans accrue interest during this time, however, causing your loan balance to grow. The only exception is Direct Subsidized Loans, which don’t accrue interest during periods of deferment. In forbearance, all loan types accrue interest.
Missed or Late Payments
If you make late payments, or you miss payments on your student loans, the ramifications can be serious. For one thing, you’ll likely be charged late fees and penalties, increasing the amount you owe. Also, your federal loan will be considered delinquent after just one missed payment. And after approximately 90 days of missed payments, your loan servicer will report the delinquency to the credit bureaus, which can then negatively impact your credit score.
After 270 days of missed payments, your loan goes into default. At that point, the government can take a portion of your wages or seize your tax refund, and the debt you owe may be sent to a collection agency. A default stays on your credit report for seven years, which can severely damage your credit.
Negative Amortization
If your monthly payments are less than the interest you’re charged (meaning you’re not paying off your interest each month), this is known as negative amortization. The interest charges will then be added to the amount you owe, causing your loan amount to grow over time.
Negative amortization can happen under income-driven repayment (IDR) plans if your payments are not big enough to cover the accruing interest each month.
Strategies for Managing and Reducing Loan Balances
Now that you know what increases your total student loan balance, these are some strategies you can consider for reducing it.
Making Extra Payments Toward Principal
Putting extra payments toward your loan balance can help you pay it down faster and save money on interest. Here’s how: Making extra payments can help you reduce your principal, which can help you save on interest over time.
So, if you get a windfall, such as a birthday gift, or you earn a little extra cash, putting that money toward your student loans could help you pay down your debt faster. Just be sure to tell your lender to direct the extra payment toward your loan principal, which can help you shrink the balance.
Enrolling in Autopay for Interest Rate Discounts
When you set up automatic payments for your federal student loans from your bank account, you’ll save 0.25% on your interest rate. Many private lenders also offer a 0.25% rate discount for using autopay. Besides the savings, autopay helps ensure your payment will be consistent and on time.
Avoiding Missed Payments Through Budgeting
Making your monthly payments by the due date will help you avoid late fees and penalties. One way to do this is to create a budget that factors in your student loans.
To make a budget, calculate your monthly income, including paychecks from your regular job plus anything you earn from a side hustle, and then make a list of all your monthly expenses, including your student loans. If your expenses are greater than your income, see where you can cut back. Perhaps you can eliminate a streaming service or two, and bring lunch from home rather than buying it every day. Creating room in your budget and then sticking to that plan, can help you make your loan payments so you won’t fall behind and end up owing more.
Long-Term Financial Impact of Growing Loan Balances
A growing student loan balance is not only stressful, but it can also harm your overall financial health.
Effects on Total Repayment Amount
The total repayment amount of your loan can increase over time for reasons that include missed or late payments that result in late fees and penalties being added to what you owe, failing to keep up with accruing interest on your loan, and deferring your student loan payments, which can result in interest capitalization, significantly increasing the amount you owe. The more your debt grows, the harder it becomes to pay off.
Impact on Credit Score and Future Borrowing
A large student loan balance can also negatively impact your credit. The amount of debt you have makes up 30% of your FICO® credit score. Owing a sizable amount of debt can drag down your score, making it difficult to qualify for new loans or credit cards or get affordable rates. Plus, a high debt load increases your debt-to-income ratio (or DTI), and lenders prefer a DTI under 36%.
Tips for Preventing Loan Balance Increases
To keep your balance from increasing, make sure you understand how your student loans work — including the interest rate on the loans and when you need to start paying them back — and then review the different options for repaying them.
Choose the Right Repayment Plan
Before picking a repayment plan, make sure you understand how it will impact your loan balance and overall costs. A longer plan can reduce your monthly payments, but it tends to increase the amount of interest you pay over the loan’s term.
For example, if you have federal student loans, sticking with the Standard Repayment Plan will help you pay off your balance in 10 years, assuming you don’t use deferment or forbearance during that time. However, your monthly payments will be higher than they would be on other plans.
On the other hand, the Extended Repayment Plan lets you stretch out your repayment period for a longer term, which can lower your monthly balance but increase the amount you pay overall.
There are also income-driven repayment plans that typically lower the amount you owe each month (read more about how these plans work below).
Stay Informed About Loan Terms and Changes
Make sure you understand the terms and conditions of your loans. Look over your loan agreement to see what your interest rate is, how much you owe, and how long you have to repay your loans. If you have any questions, contact your loan servicer.
Also, check to see how your interest accrues. If your loan accrues interest right away, consider making interest-only payments while you’re in school to prevent your balance from rising.
Navigating Loan Repayment Options
Borrowers with federal student loans currently have repayment plans to choose from that could potentially reduce their student loan payments, such as income-driven repayment, as well as repayment alternatives like refinancing.
Income-Driven Repayment Plans
Income-Driven Repayment plans base your monthly federal loan payments on your discretionary income and family size and extend your loan term to 20 or 25 years. These plans can make your monthly payments more affordable. But you may pay more interest overall on an IDR plan.
There are currently three IDR plans — the Income-Based Repayment (IBR) Plan, the Pay As You Earn (PAYE) Plan, and the Income-Contingent Repayment (ICR) Plan. On the IBR plan, any remaining balance on your loans is forgiven when your repayment term ends.
However, as part of the Trump administration’s One Big Beautiful Bill, changes are coming to IDR plans. In July 2027, most of the current IDR plans, except IBR, will no longer accept new enrollees.
In July 2026, a new plan will be introduced, called the Repayment Assistance Plan (RAP), that bases payments on borrowers’ adjusted gross income (AGI). (This and a revised version of the Standard Repayment Plan will be the only repayment plans available to new loan borrowers as of July 1, 2026.)
Under RAP, depending on their income, a borrower would pay 1% to 10% of their AGI over a term that spans up to 30 years. If they still owe money after 30 years, the rest will be forgiven. The government will cover unpaid interest from month to month. However, a borrower on RAP could end up paying more interest over the life of the loan due to the longer repayment term.
Refinancing to a Lower Interest Rate
If you have good credit (or a creditworthy cosigner), another option you might consider is to refinance student loans for a lower interest rate and new repayment terms. With refinancing, you exchange your current student loans for a new loan from a private lender.
Some potential advantages of refinancing student loans may include lowering your monthly payment, saving money over the life of the loan, and/or paying off your balance faster. A student loan refinancing calculator can help you see how much you might save.
However, it’s important to keep in mind that refinancing federal loans means you forfeit access to federal benefits and protections, including federal student loan forgiveness programs. Also, if you refinance for an extended term, you may pay more interest over the life of the loan. For these reasons, refinancing student loans requires careful thought to decide if this is the right next step for you.
The Takeaway
Student loan debt can be stressful, and seeing your loan balance rise can add to this situation. Understanding what increases your student loan balance (such as your interest rate, loan fees, and repayment plan) can help you avoid paying more than you need to on your debt.
Everyone’s situation is unique, so consider your budget, financial goals, and any plans for loan forgiveness when choosing a repayment strategy. You may find that changing your federal loan repayment plan or refinancing your existing loans might help you better manage your student loan debt.
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.
FAQ
What causes student loan balances to grow over time?
Some of the factors that can cause student loan balances to grow over time include interest that accrues; capitalization, which is when unpaid interest is added to your loan balance in certain situations, such as at the end of student loan deferment or when your six-month grace period after graduation ends; and fees and penalties due to late or missed student loan payments that are added to what you owe.
How does interest capitalization increase your loan balance?
Interest capitalization increases your loan balance because the interest that accrues during certain situations, such as student loan deferment, is added to your principal balance, making the balance bigger. You then owe interest on the new bigger balance, increasing the amount you’ll pay over time.
Can deferment or forbearance make your loan more expensive?
Yes, deferment and forbearance can make your loan more expensive over time. If you have unsubsidized federal loans or Direct PLUS loans, for example, the interest on your loans accrues while you’re in deferment, making your total loan balance bigger. (If you have subsidized federal loans, the interest does not accrue during deferment.) In forbearance, interest accrues on all types of federal loans, and the interest is typically added to the loan balance, meaning you’ll pay more over the life of the loan.
What are the best ways to lower your total loan balance?
Some ways to lower your student loan balance include making extra payments toward the principal on your student loans; paying the interest that accrues while you’re in school, during the six-month grace period after graduation, or during deferment; and setting up automatic payments for your loans to ensure that your payments are consistent and on time (as a bonus, you’ll typically get a $0.25% discount on your interest rate when you set up autopay).
Will refinancing help reduce my loan balance faster?
Refinancing might help you lower your student loan balance, but it depends on your specific situation. For example, if you qualify for a lower interest rate when you refinance, your monthly payments may be lower, which might help you to repay your loans faster. You might also be able to shorten your loan term through refinancing and pay off your loan more quickly.
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