Understanding what increases your total loan balance is imperative for borrowers in the US, where the collective student loan debt has reached a staggering $1.74 trillion. If you have a student loan currently, you might think that the loan amount is the same or going down as you make small repayments.
But that is not always the case. Several factors affect student loans and can increase your loan balance even when you are working and making timely repayments.
We have researched student loans and mentioned some key factors that increase loan amounts over time. We have also mentioned various ways to decrease your loan amount and pay off your student loan completely!
Keep reading to find out!
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What Is Interest?
Interest refers to the monetary charge that every borrower is bound to pay for the privilege of accessing money when they are in need. The concept of interest came into the picture during the Renaissance.
Before that, the social norms of ancient and medieval civilizations used to see the practice of applying interest as a sin because only people in bad need used to borrow money. Besides, at that time, there was no other product except money that was considered a loaning asset.
However, this moral dubiousness started disappearing during the Renaissance. The practice of borrowing money crossed the boundaries of fulfilling daily needs. People began to seek financial help for business expansion and to improve their financial condition.
This made loans more mainstream and created a channel for lenders to earn. Money gradually became a commodity, and the opportunity cost of borrowing it became a justified charge. Presently, interest is expressed as APR or Annual Percentage Rate for no credit check loans. You can categorize interest into two different types—simple and compound.
Simple interest is a quick and convenient method of calculating the applied interest rates on any loan. To determine simple interest, multiply the daily interest rate by the principal and the days between payments. Any short terms loans, vehicle loans, a few mortgages, etc., charge interest using this calculation.
The simple interest formula justifies its namesake—simple Interest = P x I x N (P = Principal, I = Daily interest rate, and N = the number of days between the payments). As simple interest is calculated daily, it notably benefits loan consumers. Suppose you have obtained a student loan for one year of college tuition, which costs you $20,000; the APR is 5%. You will have to pay off the loan in the next three years.
So, the simple interest amount will look like $20,000 x .05 x 3 = $3000. Therefore, the total payable amount is $20,000 + $3000 = $23,000. When you pay early every month, simple interest helps shrink your principal balance faster. As a result, you can pay off your debt before the estimated time arrives.
On the other hand, when you delay your payments, you pay more towards your interest than the principal. Your final payment is larger than your original estimation. This occurs when you fail to pay off the principal within a stipulated timeline (because you are not paying the principal at the expected rate).
Compound interest refers to the interest that the lender implies on both the principal and the interest. You can explain compound interest with the help of basic school-level mathematics.
For example, you borrowed $100, which has an APR of 5%. At the end of the year, you will have to pay $105. At the end of the second year, you will have to pay $100.25. This will add up over time till you close your loan completely.
Whether your loan is subsidized or unsubsidized determines your responsibility for paying off interest accruing. When you avoid paying the interest on an unsubsidized loan, your lender may choose to capitalize the amount.
What Is Capitalization?
Capitalization refers to the addition of unpaid interest to the principal loan balance. The principal loan balance typically increases when the loan payments are postponed or unpaid.
Typically, you don’t need to pay anything towards your student loan when enrolled in school at least half or six months after your leave. However, this applies to subsidized loans only. When you have unsubsidized federal loans, you will still have to experience accrued interest during the said periods.
Once you start repaying your debts, this accrued interest will capitalize. As a result, your new loan balance will bloat like a balloon. Depending on your repayment plan, capitalization may notably increase your monthly payment.
10 Factors That Can Increase Your Loan Balance Quickly
There are several factors contributing to an increased loan balance. Naturally, you will always want to pay as little interest as possible as a borrower. However, if you put yourself in your lender’s shoes, you can see the other side of the coin. Interest is the primary channel of income for lenders.
Besides, lending is never risk-free. When someone takes the risk, asking for a cost is justified. Therefore, the responsibility of playing tricky is always on the borrower’s shoulders.
Following are some of the most common factors contributing to an increased loan balance. Knowing about them can help you prevent your loan balance from growing.
1- Variable Interest Rates
If your loan has variable interest rates, it can also lead to an increase in your total loan balance quicker than expected. Unlike fixed interest rates, variable rates change according to market conditions. The interest you owe each month can increase if this rate increases. Borrowers who have taken variable-rate loans may have to deal with higher monthly repayments that do not even cover the accruing interest, thus increasing their total loan balance.
2- Delaying In Repayment
Lenders typically don’t ask for immediate repayments when you borrow money. They expect the amount on time, though. However, you may delay the payment for several reasons.
Besides, certain delays depend on the purpose and type of the loan. For example, most students can’t repay their loans regularly until they complete their studies. However, capitalization keeps working in the background, which increases the loan amount in this period. Naturally, this significantly raises the loan balance.
3- Make Lesser Payment Than The Requested Amount
Your loan balance can significantly increase when you pay less than your lender requests. Often, private lenders let you pay a temporarily reduced amount. Though it may look like a lucrative break for many, the reality is that the interest is still accumulating. Naturally, this allows lenders to earn a few extra bucks; however, you experience an increased loan balance in the long run as a borrower.
4- Income-Driven Payments
This issue typically happens with federal student loans. Federal income-driven plans allow borrowers to make payments based on their income. This repayment structure doesn’t depend on what the borrower owes. Though it may sound pretty relaxing, it may increase the monthly interest on the loan, and when it happens, the entire loan balance starts rising over time.
5- Extended Repayment
When you take a loan, you can find plans that allow you to pay the amount in full for as long as 20 years. You may be happy about those long tenures; however, the reality differs.
The payments you make in the early days go towards the interest, which makes the process of paying down the principal amount utterly slow.
Adding up this amount with the accumulated interest you have grown during school creates a large loan balance, which is much larger than the original borrowing amount.
6- Loan Refinancing or Consolidation
Refinancing or consolidating your loans can lower interest rates and monthly repayment amounts. However, it may also increase the loan balance under certain circumstances. For example, extending the loan term through consolidation can lower monthly payments but increase the total amount of interest paid over the loan duration. Also, any refinancing or consolidation fees will be added to the principal balance, increasing the amount owed even more.
7- Forbearance And Deferments
There are a lot of lenders who let their struggling borrowers take a break from consistent payments. For student loans, you can even expect certain grace periods. However, the interest still counts, increasing the loan balance in the long run.
8- Interest Capitalization
Interest capitalization happens when unpaid interest is added to the principal balance of your loan. This usually happens after periods of forbearance or deferment and when you enter repayment from these states. Once the interest is capitalized, it starts accruing its own interest, leading to a compounding effect that can significantly increase your total loan balance.
9- Errors In Calculation
To err is human, and lenders are not aliens! They can even make mistakes that bring bitter results, like raised loan balances. While manually adjusting the balance, your lender may make a few wrong calculations.
For this reason, you should always keep copies of loan statements and documents so that you can produce them as proof that your lender made awful mistakes. You can file a complaint with the Consumer Financial Protection Bureau (CFPB) to get those deadly errors corrected.
10 - Fees and Penalties
Late payment fees, upfront fees, prepayment penalties, deferment, and default fees can significantly increase your total loan balance. If you miss a payment date, your loan accrues interest during this period, and you will be hit with a late fee that can add up to your total loan balance. Also, other administrative costs may be added to your principal balance if not paid promptly.
How Can You Lower Your Total Loan Balance Gradually?
If you’re wondering how can you reduce your total loan cost, there are several manageable ways you can try. Besides, by following these tricks, you can pay off your student loan much more efficiently, making way to make the most of each payment.
Pay More Than the Minimum Payment
Try to pay over the minimum amount every month. When you spend some extra money with your monthly loan payment, you can significantly reduce the total cost of your loan over time. You can keep paying the monthly payables even if you have already satisfied your future payments.
This will help you pay off your loan faster and improve credit score. However, before making additional payments, confirm with your lender if those payments can be allocated to your higher-interest loans.
Opt-in Automatic Debit
Signing up for auto-debit can reduce your interest rate by 0.25%. Almost every lender typically lets you opt-in for automatic deduction of your student loan payment. All you need to do is update your details with your lender and consent to automate loan payments.
Setting up auto deductions will help you make timely payments. Besides, you will get a 0.25% interest rate deduction for enrolling. Before signing up for auto deduction, check whether your loan is eligible for the interest rate reduction.
Avoid Delayed Payments
It’s worth remembering that interest rates increase when you delay payments or pay less than the requested amount. Therefore, start paying off your student loan payments during the grace period itself. You can even pay them off while you are in school.
Though you are not bound to pay in the suggested way, doing so will help you cover the monthly accrued interest. This will result in lesser interest capitalization. In this way, you can reduce your principal loan balance.
Pay Loans with Tax Refunds
One of the most convenient early payoff strategies is to dedicate your tax return to paying off your student loan debts. Student loan interest is tax-exempt, and because of this, you receive tax refunds. So, it won’t trouble you to dedicate that amount to paying that interest, helping you pay off your loan faster.
Loan Forgiveness/ Repayment Alternatives
You can apply for a federal student loan forgiveness program in a few situations. Different forgiveness and repayment programs are available for public servants, teachers, army personnel, etc. However, these programs typically feature certain eligibility requirements.
Consider checking out your qualifying status before you apply for forgiveness. Apart from forgiveness, you can also check with your employer to find out if they offer repayment assistance for student loans.
Try Out Snowballing
Try the debt snowball method if you have considered paying more than the minimum amount. It asks you to make the minimum payment on all your debts. The smallest ones, however, are exceptions. You can pay those small payments as much as you can.
This way, you can snowball payments toward your smallest debts. This will allow you to pay it off quickly and move on to the next smallest loan amount. The method can effectively help you to focus on a single debt at a time. This way, you minimize the chances of missing payments because of financial strains.
Typically, the snowball method works well for any loan, including student loans, mortgage loans, vehicle loans, etc. However, you shouldn’t use this method to pay off payday loans, as they feature much higher interest rates. Thus, you should pay them off as soon as possible.
Crosscheck Your Budget
Though it’s not directly related to the loan balance reduction, it can help you save some bucks on your loan payment. When you earn more and spend less, you can pay your debts more quickly by adjusting your budget.
You can pay extra with your monthly payments, snowball easily, and, most importantly, always keep some money to pay your interest on time. All of this together helps pull down your total loan balance. Therefore, take a little time to cross-examine your budget. Remove the unnecessary expenses and classify items as needs and wants.
Refinancing
You can also consider refinancing your debt to a lower interest rate. This can help you save a lot of bucks in interest. Besides, you can pay off your loan faster. You can use a debt consolidation program to refinance your student, personal, vehicle, or mortgage loans. You can even transfer the debt to a balance transfer card featuring 0% APR for a particular time.
Loan Avalanche
The debt avalanche strategy works like the snowball one. However, it focuses on ordering debts by interest rate. This works best when you have more than one loan to pay off. First, you need to list all your loans to apply for a debt avalanche. Arrange them in the order which keeps the interest debt first and then the lowest ones.
Once done, you can start paying off the loans with higher interest rates fast and make minimum payments on every other debt. This helps you cut back on the total amount you pay towards interest. In addition, by making on-time payments, you help lower the total loan balance.
Negotiate With Your Lenders
If you’re still wondering how can you reduce your total loan cost, you might want to negotiate directly with your lenders. This means discussing options for lower interest rates, requesting to waive certain penalties or fees, or settling the entire loan balance under certain conditions, such as a large, one-time payment towards an existing balance.
You can do this independently, but the negotiation is usually more effective through debt relief companies. Lenders might be willing to offer more favorable loan terms to ensure they get back some of the loan amount, especially if you’re facing financial difficulties.
Understanding The Basics Of Student Loans
Now that you know about repayments and how to reduce the total loan balance, here’s a quick revision. Understanding the nitty-gritty of a student loan may help you plan things better, allowing you to avoid the chances of increasing the loan balance outrageously.
The straightforward definition of a student loan looks like this – when you borrow money from the government or any private lender to pay for your education, you can call it a student loan. Like any other loan, student loans need to be paid back on time, and as you know, they come with interest, which keeps on building up over time.
Given this fact, smart individuals use their student loans dedicatedly to pay off tuition fees, books, and other study-related expenses. However, some legends dare to use that money for other adventurous stuff like exotic trips to Jamaica or ravishing parties in Miami.
A quick reminder for them is that student loans are not grants or scholarships. Whether you want it or not, you must pay it back. Good luck if you still want to use that money to sponsor your fun trips or midnight adventures.
You can apply for student loans by filling out the FAFSA form (Free Application for Federal Student Aid). The students must put their financial information on the form, which they can then send to the school of their choice.
Each school houses an office of financial assistance, determining how much aid the applicant qualifies for. While filling out the FAFSA, eligible students can expect grants or scholarships, lucky they.
However, for those less fortunate, even the loan is not sanctioned. They have another alternative. They can simply apply for private student loans directly from the lender. However, be it a federal or private loan, signing up for a promissory note is mandatory. This promissory note acts as a legal document/agreement that holds the student’s consent about repayment. You can read this guide before applying for a student loan.
You can have several alternatives to pay off your student loan. They include the following:
Graduated repayment plans: This plan lets you start with lower payments; however, they increase every couple of years. You need to pay off your entire loan balance within ten years. However, it’s available only for federal loans.
Income-based repayment plans: In these plans, you pay off your loan based on a percentage of your income. Typically, the rate is 10-15% after deducting the amount for tax and personal expenses. You can get the payments recalculated every year. The lender may also adjust payments by considering factors like family size, current earnings, etc. It’s available for federal loans only.
Standard repayment plans: The most common repayment plan features scheduled payments and fixed monthly payment amounts. The normal repayment tenure for federal loans is ten years, and for private loans, it may vary.
Income-sensitive repayment plan: It’s another federal-only plan where the payments depend on your total income before other expenses and taxes. You need to pay off the loan amount in ten years. Apart from the ones mentioned above, there are other federal plans like income-contingent repayment, etc. For a private student loan, the rules for repayment may vary from one financial institution to another. You need to check with your lender before heading toward the application process. Many lenders provide student emergency loans with no job.
Ideally, you shouldn’t even think of not paying off your loan. However, things don’t always go the way you plan. Therefore, there might be scenarios where you can miss payments unintentionally. Missing payments, however, can cost you more in the long run. There are a few things that you can do when you miss your payments. However, remember that the options will somehow increase your loan balance.
Deferment and Forbearance: Deferment and forbearance are temporary relief. They don’t want you to make payments temporarily, but the interest will still count. Besides, deferment and forbearance have their own qualifying thresholds, including unemployment, military work, etc.
Default: Missing payments are still ok, but defaulting can lead to ultra-serious consequences. You default on a loan when you keep on missing payments. In other words, you are a defaulter when you fail to pay back the loan according to the terms mentioned in the agreement. Defaulting your student loan may take you to court, ruin your credit score, and deprive you of future financial aid. Not funny at all!
Forgiveness: Though not everyone is eligible for this option, you can still give it a try. The eligibility options include working in the public sector (full-time) and making payments for ten years, working as a teacher in a low-income school for at least half a decade, etc. However, getting approved for forgiveness is more like getting a jackpot. Last year, only 1% of the applicants got approval for forgiveness. Tricky indeed, but not impossible!
FAQs Regarding Loan Balance
Q1. What increases your total student loan balance?
Like any other debt, student loans come with dedicated student loan interest rates. They may be cheaper than credit cards or personal loans, but they can still make a big hole in your pocket if you don’t pay them off smartly. When you delay your payments, choose to walk with an income-driven repayment plan, and pay lessers than requested, you may have to pay off an increased loan balance and interest payments. There are other influencing factors as well. Therefore, it would help if you could go through them thoroughly.
Q2. Can your income affect your student loan eligibility?
Yes, it does. How much student loan you will get depends on your household income and your state of residence. Typically, most students get the approval of less than the maximum loan amount available.
Q3. What happens when you fail to pay your student loan?
When you don’t pay off your student loans, you can experience several consequences, none of which are sweet. Your credit score will drop, you won’t get future financial aid, you will have to pay late fees, and they will withhold your tax returns. In worst cases, the lender can garnish your wage, which may be as big as 25% of your disposable income. Apart from that, there may be potential lawsuits.
Q4. What happens to your total loan balance if you take a break from payments?
Taking a break from payments through forbearance or deferment may temporarily stop your monthly payments. However, it won’t stop your interest from accruing even more interest. This will increase your total loan balance as the unpaid interest gets added to the principal balance.
Q5. How to track student loan repayment progress?
Tracking your student loan progress is easy. For federal loans, you can visit studentaid.gov, while for private loans, you just need to check and visit your lender’s official website. After logging in, you can typically find your loan amount and balances, interest rates, current loan status, etc.
Q6. How long will it take to pay a $100,000 student loan?
It depends on your loan repayment tenure and the type of repayment plan you choose. Typically, with a standard repayment plan, it may take up to 20 years to pay off your loan balance if you don’t come across a lot of financial obstacles on your way.
Q7. How can automating loan payments help reduce your total loan costs?
Automating your loan payments can help you reduce costs by ensuring timely payments and preventing late fees. Some lenders even offer lower interest rates for borrowers who opt for automated payments, directly reducing the total interest to be paid during the loan’s duration, thus reducing overall loan cost.
Q8. What loan forgiveness programs could eliminate part of your total loan balance?
Loan forgiveness programs like Teacher Loan Forgiveness or Public Service Loan Forgiveness (PSLF) can successfully eliminate part of your total loan balance. These programs are specifically designed for people in certain professions, taking off remaining debt after they make a qualifying payment.
Q9. How can negotiating with lenders potentially reduce your total loan fees and costs?
Negotiating with lenders can reduce your total loan fees and costs by lowering penalties and interest rates and waiving late fees under certain circumstances. Lenders may be willing to adjust terms for borrowers who are facing financial hardships, leading to reduced fees and overall loan balance.
Conclusion: How to Decrease Your Total Loan Balance?
Finally, you know what raises your overall loan balance, and things are under your control when you have the key.
Pay off your debts smartly, or take emergency loans for bad credit. Don’t default payments, avoid late fees, and pay off the entire due amount strategically as soon as possible. This will help you save a lot of money that you pay because of capitalization.
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