Understanding What Increases Your Total Loan Balance

Student loans can be a daunting responsibility, but understanding your loan balance and what influences it is key to staying in control. With federal student loan interest set to resume in September and payments resuming in October, now's the time to brush up on all things student loans, with a special focus on items and actions that will increase your total balance.

Federal Student Loans Vs. Private Student Loans

First, a word about student loan types.

Federal student loans are backed by the government and typically come with more generous repayment terms such as income-driven repayment plans, deferment options, interest rate discounts, loan consolidation, and other features.

Conversely, private student loans are usually funded by banks or credit unions and don't always come with the same benefits as federal loans.

When it comes to your student loan balance increasing, most of our discussion will carry over to both federal and private student loans

Understanding Your Loan Balance

Your principal loan balance is the total amount you owe — the original loan amount plus accrued interest and fees. If you have multiple loans, they each have their own balance and are subject to their own set of fees, penalties, interest charges based on your loan agreement with the financial institution that issued the loan.

Your principal balance is important because it affects how much you owe each month in student loan payments. The higher your total loan balance and the higher your interest rate, the more you’ll pay monthly and over the life of your loan.

How Student Loan Interest Affects Your Total Loan Balance

Interest is charged as a percentage of your total loan balance and is usually capitalized, meaning it increases your total loan balance and can increase the overall amount owed. In many cases, interest on student loans is calculated daily and added to the loan balance at a specified interval — usually once a month or once a quarter.

For federal loans, you can pay your accrued interest before it capitalizes (is added to the loan principal) by making additional payments on top of your regular monthly payment. Additional payments are applied first to any accrued interest and then to your loan balances.

Private loans may be different. If your loan was issued by a bank or credit union, review your loan documents to know if they are charging compound interest and when they apply accrued interest so you know how interest increases your total loan balances.

What Can Increase Your Loan Balance?

The biggest causes of student loan balances increasing over time are:

• Unpaid interest, which capitalizes (adds to the loan principal) at certain intervals;

• Not making payments on time or missing payments altogether;

• Any fees the loan servicer applies; and

• Taking out additional student loans.

Each of these expenses increases your total loan balance.

The Impact of Late Payments and Penalties

Late or missed payments can result in penalties and increased interest rates. Just like personal loans and credit cards, missed payments can negatively impact your credit score, all of which can increase your loan balance and your monthly loan payment. All of this can cause your principal balance to grow.

If you're having difficulty making your payments, contact your loan servicer or request student loan assistance to see if you qualify for an income-driven repayment plan or other deferment options.

Finally, if you increase your student loan balance by taking out additional loans, be sure that you understand all of the associated terms and conditions (including interest rates, fees, and repayment terms) before taking out the loan.

What Can You Do to Avoid an Increasing Loan Balance?

Federal student loan debt will begin accruing loan interest on September 1st. The best way to prevent your total student loan balance from increasing is to make payments on time and, if you can, pay more than the minimum due. Extra payments reduce the amount of interest that accrues and is capitalized, or added, to the loan balance.

You can also contact your student loan servicers to see if you qualify for a lower interest rate, a reduced minimum payment, or other types of repayment assistance. Check with organizations such as IAPDA for free resources and student loan relief services.

Understanding what affects your loan balance is key to managing your student loans and preventing them from defaulting. Taking proactive steps now can help you save money in the long run and keep your student loan debt under control.

How Federal Student Loans Can Affect Your Balance

Government-backed loans come with benefits that can help manage your loan balance. For instance, federal loan borrowers may qualify for an income-driven repayment plan based on their earnings. This type of plan sets your monthly payments at a percentage of your income and will be recalculated each year.

In addition to the possibility of lower payments, other benefits to federal student loans can help keep your loan balance from increasing and creating financial hardship.

The Specifics of Federal Student Loans

Federal loans offer repayment plans based on income, loan forgiveness programs, and deferment or forbearance options that can temporarily pause your loan payments, but interest may continue to accrue and increase your student loan balance.

Interest Rates and Federal Loans

Government-backed student loans have fixed interest rates, which means the interest rate will not change over the life of the loan. The interest rate is determined based on the date the loan was taken out and what type of loan it is.

Is Student Loan Consolidation an Option?

Another way for federal student loan borrowers to reduce their total balance is through loan consolidation. Loan consolidation combines your federal loans into a single loan with one interest rate and one monthly payment.

The Influence of Monthly Payments

Your monthly payments play a big role in your loan balance. Making on-time payments each month will help keep your loan balance from increasing and you won't have to worry about late fees or penalties.

Additionally, making extra payments (above the minimum due) can lower total interest costs by reducing the amount of interest capitalized and added to your loan balance.

Navigating Student Loan Payments

Staying on top of your loan payments is critical to managing the repayment of your loans. Many people have not made payments on their student loans since the payment freeze began in 2020.

Here's what to do if you're suddenly staring down a large student loan balance.

1- Contact your loan servicer.

First, contact your loan servicer to discuss repayment plans or other options that may be available to you. There are several income-driven repayment plans for federal student loans that base your monthly payment amount on your earnings and family size, which can help if you’re having difficulty making payments.

2- Consider loan consolidation.

If you have multiple federal loans, consider consolidating them into one loan with one interest rate and one monthly payment amount. This may help make it easier to pay down your loans and keep your loan balance under control.

3- Make extra payments or pay more than the minimum due when possible.

Were you one of the lucky ones who saw their savings account balance increase over the past few years? The amount of interest that accrues and is added to your loan balance can be reduced by making extra payments or paying more than the minimum due when possible. A lump sum payment can lower your total loan balance and save you money in the long run.

4- Take advantage of student loan forgiveness programs.

There are several federal student loan forgiveness programs available, such as the Public Service Loan Forgiveness Program or Teacher Loan Forgiveness Program. Depending on your career path and other qualifications, you may be able to reduce your student loan balance and even have it forgiven entirely.

Taking Control of Your Student Loan Balance

Student debt is a major expense for millions of households. Understanding your loan balance and the factors that influence it can empower you to take control of your student loans. Making on-time payments, taking advantage of repayment assistance or loan consolidation options, and understanding the terms of any additional loans you take out can all help reduce your student loan balance.

For more information and resources about managing student loans, head to IAPDA.org for free advice from experts in the field. With a little knowledge and planning, you can keep your student loan balance under control and stay on track to paying off your debt.