For many students, student loans are a big financial obligation to undertake in the process of acquiring higher learning. Though it offers vital funding for tuition fees and living, understanding how one’s loan balance could grow over time remains essential for finances. This text explains some causes of increased total loan balance to help the borrowers in better dealing with student debt.
Factors that increase loan balances
There are several ways that your total loan debt can increase even if you make all your payments on time and as agreed. Here are a few:
- Interest accrual: Interest is a key component in enhancing the growth of the amount required to be paid out as a loan. In most events, student loans begin accruing interest from the day they are disbursed. For instance, in the case of taking $20,000 at a 7% interest rate, you will start adding up interest right from the start. If you do not make payments during your grace period, the interest accumulates, leading to a higher balance when you begin repayment. For instance, in a nine-month grace period where the interest accrues as $116.67 a month, you could increase your loan balance by as much as $1,050 before the initial payment is required. This is of particular application to unsubsidized federal loans and most private loans, meaning the borrower is responsible for all accruing interest.
- Capitalizing of interest: Note that capitalization is the addition of unpaid interest to your outstanding principal loan balance. This can be done at different times, such as when you are leaving a grace period and starting repayment or when you are changing repayment plans. In short, once interest is capitalized, you are charged interest on a higher amount of principal, leading to an increase in your total debt over time. Within this loan balance is $1,000 worth of interest that has already accrued. Thus, your new principal balance is $21,000. Interest in future periods is assessed on this new, larger balance, compounding your debt.
- Fees and penalties: Student loans also include dozens of different fees which can have an impact on the balance of the loan. Common fees include:
- Origination fees: These are upfront fees that the lender charges you to process your loan. For example, if you borrowed $10,000 at a 2% origination fee, you would actually receive $9,800 but be charged for the whole $10,000.
- Late fees: If you make a payment late, you may be assessed a late fee by your lender in addition to your loan. Essentially, this means you will be paying interest on those fees, making your financial obligation even higher.
- Collection costs: If you fail to pay back your loan, collection costs can be added to your loan balance, substantially increasing the amount you owe. Making regular, on-time payments and letting your lender know about any difficulty with paying back your loan is the best way to avoid these fees.
- Income-Driven Repayment Plans: Although IDR plans can make monthly payments more manageable, they also lead to your loan balance growing. These plans base the monthly payment on your income so that it can take up to 20–25 years to repay. However, you pay only once a month. If your monthly interest is greater than your monthly payment, then the unpaid interest gets added to your principal balance payment. The result is said to be negative amortization and you owe more than you did the month you started; in this example if your monthly payment figures out to be $100 and your interest is $150 you are growing your balance $50 every month even though you are making payments.
- Deferment: It is simply a temporary pause on your student loan repayments, usually available for federal student loans when you’re at least half-time in school or during a six-month grace period following graduation. You also can apply for it due to financial or medical hardship, among other circumstances. Although deferment does offer an option for relief from financial burden, it’s important to note that interest typically continues to accrue on your loans during this time and may be capitalized once you are no longer in deferment. This simply means that interest accrued is added to your principal balance, hence increasing the amount. One such exception is the Direct Subsidized Loans; during school enrollment and the grace period, the government pays the interest.
- Forbearance: General forbearance allows you to temporarily reduce or cease payments on your federal student loans, usually for 12 months at a time. While interest will continue to accrue, it typically capitalizes at the end of the forbearance period—that is, any accrued interest is then added to the principal amount owed when forbearance ends. This applies to nearly every category of federal student loan, except Federal Perkins Loans. Private lenders may also grant forbearance, but their terms are usually far from flexible, and most of them charge a fee for initiating forbearance.
Loan balance management and reduction strategies
Dealing with your student loan debt begins with understanding how it is that the balance of your loan increases. Here are some ways you can help to minimize the growth of your total loan balance:
- Pay interest while in school: If you are receiving unsubsidized loans, you should consider making at least interest-only payments while you’re in school to prevent interest from building up.
- Opt for fixed interest rates: If some option, then one should always opt for loans, which have fixed interest rates to avoid fluctuations which raise your total balance.
- Be informed regarding fees: Be cautious concerning what fines one may incur with his loans and do more to dodge them.
- Consider refinancing: if one has high rate of interest loans, then refinancing can help him reduce his rate of interest and decrease his total debt burden.
What really counts to be known is what raises one’s overall loan balance if remaining desirous of managing student debt effectively. Interest accrual, capitalization, fees, and structures of repayment plans all make a huge difference in the amount one is to pay for a very long time. With good, proactive information, a borrower can work on the steps to minimize this debt and work toward financial stability.
