Many Student Loan Borrowers Owe More Now Than When They Started Paying — Here’s Why

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When you make monthly payments toward a loan, you expect the balance you owe to go down. For many student loan borrowers, that isn’t the case.

In 2021, almost two out of every three student loan borrowers who made voluntary payments during the COVID-19 payment pause ended up owing a larger balance than they originally did, according to a report from the National Consumer Law Center and the Center for Responsible Lending.

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But they’re not alone. As states cut funding for higher education, tuition costs rise and land on the shoulders of students and their families.

More and more students now rely on loans to complete their higher education, and student loan balances can increase for a number of reasons. Here are a few to look out for.

Outstanding Interest

When you take out a loan, you agree to pay it back with interest. But certain options for borrowers have some hidden consequences.

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It’s important to remember that interest will always accrue over time. And whenever you’re left with unpaid interest, it will be capitalized, or added back into the principal amount you borrowed.

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‘Grace’ Periods

In-school deferment is an often-used option for student loan borrowers. But after graduation, temporary pauses in payments can increase the amount they’re ultimately going to pay.

If you are temporarily unable to make student loan payments, you could apply for a forbearance – a short-term pause on your student loan payments. But during that pause, your loans can still accrue interest.

During a forbearance, you can opt to pay the interest each month before it’s capitalized. That will keep your total loan cost down. If you are able, set a little money aside in a savings account each week to cover the interest that has accrued on your loan at the end of the month. 

Many borrowers opt to stop making payments altogether during forbearance periods. That will increase the original amount they owed.

If you rack up some unexpected expenses, consider options that could decrease your monthly payment before requesting a pause on your payments altogether.

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Longer Repayment Plans

Some federal student loan repayment plans do not focus on paying off the principal balance you owe right away. 

The Extended Repayment Plan allows you to pay off your loans over a 25-year period rather than the standard 10 years. If you opt for an Extended Graduated plan, your monthly payments will start out lower and increase every two years or so. This option can be helpful for recent grads who are still in the process of applying for jobs, or have less expendable income to start but plan to make more money in the future.

However, in the beginning of the Extended Graduated Repayment Plan, payments are made toward the accrued interest on the loan – not the principal loan itself. Meaning you will end up paying more than you originally borrowed over time.

If you need a lower monthly payment, you can see if you qualify for an Income-Based Repayment or Income-Contingent Repayment Plan. While these plans will still accrue interest over time, they are specifically formatted to be dependent on your income level, and can even provide some interest benefits on subsidized loans.

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After making payments for 20-25 years on Income-Driven Repayment Plans, the remainder of your student loan debt could even be forgiven. You’ll just be taxed on that remaining balance in the next year’s tax return.

Negative Amortization

Negative amortization is kind of a last resort in loan repayment. This occurs when you reduce your monthly payment to an amount that is less than the interest you’re charged for that month, like the minimum payment on a credit card. While it may feel like you’re running up that hill and making monthly payments, that remaining interest still gets capitalized into your initial balance. That’s why the amount you owe still increases at the end of each month.

But that’s not all. That new higher balance you’ve just accrued comes with higher interest, which could make your monthly payment go up, too.

If you’re in a tough spot, talk to your student loan servicer about options that could keep your overall balance and monthly payments from a significant increase.

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