Increasing student loan balances are a very real and very frustrating problem.

We frequently receive emails from borrowers who have much larger balances on their debt than what they originally borrowed. This issue is so common that nearly half of all student loan borrowers have an increased balance after 5 years. In some cases, missed payments and late fees can explain the larger balances. In many cases, however, the borrower hasn’t done anything wrong, yet the balance still increased.

Here, we’ll look at ways a student loan balance can increase and review some strategies to prevent it from happening.

In this Article:

What causes a student loan balance to increase?

Borrowers making timely payments reasonably expect that their balance should be lower due to their efforts. There are many possible explanations for why a student loan balance might be larger than where it originally started. However, the following two reasons are the most common:

Growth During School – Most borrowers don’t make payments during school. Yet, interest still grows on the loan during school (the one exception would be a federal subsidized loan). This can mean years of growth and compounding interest. As a result, many borrowers enter repayment with a balance significantly larger than what they actually borrowed.

Income-Driven Payments – This issue is unique to federal loans. Because federal income-driven plans allow borrowers to make payments based upon what they can afford rather than what they owe, the monthly interest on the loan may be higher than the monthly payment. When this happens, the total student loan balance increases with each passing month.

Other reasons a student loan balance may be increasing

Other reasons a student loan balance may increase include:

Deferments and Forbearances – Many lenders allow struggling borrowers to take a break during repayment. Most lenders also give students a six-month “grace period” after finishing school. Even though there is no bill due, the interest is still working for the lender and growing the balance.

Payments Requiring Less Than the Monthly Interest Accumulation – Sometimes, private lenders allow borrowers to have a temporary reduction in the amount they are expected to pay each month. While this provides a break for borrowers, the interest usually continues to accumulate. Smaller payments help borrowers stay current, but they help the lenders make some extra money from the extra interest.

Extended Repayment Plans – Some repayment plans are designed to take 20 years or more before the loan is paid off in full. This means early payments mostly pay down the interest. Borrowers on these plans are paying down their balance, but very slowly. When you add in the interest that grew during school, the total loan balance will often be larger than the original amount borrowed.

Calculation Errors – Lenders aren’t perfect, and it’s possible that an error has been made. Where the lender made any manual adjustments to the balance, mistakes are especially common. Borrowers should keep copies of loan statements and documents so they can prove any errors. Sometimes filing a complaint with the Consumer Financial Protection Bureau may be necessary.

There are a number of reasons that a balance may have increased beyond the original amount borrowed. The good news is there are several tools and strategies a borrower can use to get the balance lowered.

Lowering the Principal Balance on Loans

Make Extra Payments – The most common and effective way to lower a student loan balance is to make extra payments. When borrowers make payments, the money is first applied to any fees, it then covers accumulated interest. Only after does it finally lower the principal balance. Because the monthly payment normally covers these three categories, extra payments will go entirely towards the principal.  Even a little bit extra can make a huge difference in the long run.

Get Real Lender Assistance – Federal loans may have the best terms, but some private lenders have been known to occasionally help out borrowers that are really struggling. For example, Navient has what is called the Rate Reduction Program. On this program, borrowers who have payments larger than they can afford can get temporary reductions in their interest rate. This interest rate reduction means more of the payment will go towards the principal balance.

Remember to Attack the Highest Interest Rate Loan First – The biggest enemy to eliminating student debt is interest rates. The higher the interest rate, the more difficult it is to eliminate the loan. Borrowers focused on eliminating the loan with the highest interest rate first can get their loans paid off as quickly as possible, while minimizing the amount spent over the life of the loan. Some people choose to pay a little extra on all of their loans, but it is far more effective to focus on a single loan.

Sign Up for the REPAYE Plan – Though there are many federal income-driven repayment plans, one of them has a special perk for borrowers whose monthly payments are less than the monthly interest. The REPAYE plan will immediately forgive half of the extra interest that accumulates each month. For example, suppose a borrower has loans that generate $200 of interest per month. However, the borrower is required to pay only $50 per month. Instead of the balance growing by $150 per month, it will only grow by $75 per month on REPAYE. Switching to REPAYE won’t stop the balance from increasing, but it will slow it down.

Find Lower Interest Rates – Lenders like SoFi, Laurel Road, and CommonBond all offer interest rates below 3%. These lenders can be picky about credit approvals, so it is a good idea to shop around and check rates with many of the lenders offering student loan refinancing.

One Last Bit of Good News…

As borrowers begin repayment, most of their payments will go towards the interest with only a small amount being used to reduce the principal balance. However, as the balance drops, the monthly interest that accumulates will also drop. This means that the same student loan payment will go further towards eliminating the principal balance with each passing month.

Just as setbacks can cause a student loan balance to spiral out of control, positive progress can likewise build momentum.

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