6 Factors That Increase Your Student Loan Balance

Student loan debt is near an all-time high—more than $1.7 trillion in total in the United States at the end of 2023, according to data from the Education Data Initiative. With the federal student loan payment pause ending (and if you aren’t eligible for the Biden Administration’s cancellation of $4.9 billion in student debt), you may be among the many borrowers starting to see your account balance go up instead of down.

There are several reasons why student loan balances increase, including interest charges, fees, and repayment plan structure. We’ll review every factor that can cause your student loans to expand over time and what you can do about it.

Factors that lead to an increase in your loan balance

Here are a few reasons why your student loan balance might be going up, even if you’re making monthly payments:

1. Loan interest

Most student loans charge interest from the date your loan is disbursed. Student loan interest accrues daily based on your loan interest rate. Loans with higher interest rates will accumulate interest faster and come with higher monthly payments as a result.

Your loan payments are typically deferred until you graduate. That means you might not make student loan payments for four or more years. However, interest usually accumulates during this deferment period, so your loan balances will continue rising until you make payments.

For example, if you have $30,000 in student loans with a 7% interest rate, you could accumulate $2,100 in interest during your first year in school. This means your loan balance is now $32,100 after one year. If you don’t make any interest payments while pursuing your undergraduate degree, upon graduation, your $30,000 loan balance would be $38,400.

2. Unsubsidized vs. subsidized loans

Subsidized federal student loans do not charge interest while you’re in school or during the grace period after you graduate. The interest is paid by the government and does not accrue while your loans are deferred while attending school at least half-time.

Unsubsidized loans are federal student loans that accrue interest daily while you are in school. If you have unsubsidized loans, your balances will increase as interest accrues. Private student loans are similar to unsubsidized loans, and interest will accrue when the loan is dispersed.

3. Interest capitalization

Interest capitalization adds your accrued interest to your student loan balance. This usually occurs at the end of the grace period, typically after graduation.

If you have unsubsidized loans and don’t make any payments during school, the accumulated interest will be added to your principal loan balance. This means you will now pay interest on a larger balance, causing interest to accumulate even faster.

To avoid interest capitalization, you can choose to make interest payments while you’re in school or during any grace periods where interest is still accruing. This will prevent the interest from being added to your overall loan balance.

4. Student loan fees

In addition to interest charges, several fees may be assessed as part of your student loan application or repayment process, and these fees may be added to your loan balance.

Some common fees include:

• Loan origination fees. Most federal student loans include an origination fee equal to a small percentage of the total loan amount. Private loan fees vary and depend on the lender. For example, College Ave. does not charge an origination fee, but other private lenders do.
• Late payment fees. If you make a late payment, you incur a fee. Amounts vary by the type of loan and lender.
• Returned check fee. You may have to pay a fee if you pay your student loans by check and it bounces or is returned. This amount will also vary by lender.
• Non-sufficient funds (NSF) fees. If you make an electronic payment but don’t have the funds in your account, you may be charged an NSF fee.
• Collection fees. If your student loans end up in collections, you may be assessed fees for court costs, attorney fees, and other associated costs.

5. Income-driven repayment plans

If you’re on an income-driven repayment plan (IDR), you may end up with negative amortization. In this instance, your monthly payment is smaller than the interest charged on your loan, so interest accumulates over time. For some plans, the interest will be added to your total loan balance periodically increasing the amount you have to pay off.

As of July 1, 2023, students who elect the SAVE income-driven repayment plan no longer capitalize interest after leaving the plan. The only IDR plan that still capitalizes interest is the Income-Based Repayment (IBR) plan.

6. Deferment or forbearance

Most loans will accumulate interest if you defer your student loan payments (either while enrolled in school or for another reason). And entering a period of forbearance means you won’t make monthly payments, but interest will still accrue.

In both cases, interest will be added to your principal balance after restarting a regular payment plan, increasing your overall loan balance.

Common mistakes that lead to a higher loan balance

There are a few mistakes you can make when managing your student loan that will cause your loan balance to grow. Watch out for the following missteps:

Missed payments

If you miss a payment, you might be charged late payment fees. While these fees don’t typically affect your loan balance, they’ll be added to your monthly bill until you pay them off.

Not paying interest while in school

If you have an unsubsidized federal or private student loan, you can decide not to make any payments while in school. However, interest will accrue during that time and eventually capitalize, adding the accumulated interest to your loan balance. You can avoid this by repaying your student loan while in school.

Consolidating your loans

If you choose to consolidate your student loans, any unpaid interest will be added to your total loan balance on the new loan. This means your loan balance may be higher after loan consolidation than before, forcing you to pay interest on the higher balance.

Not applying for subsidized loans

If you qualify for subsidized federal student loans but don’t choose to use them, you’re missing an opportunity. Subsidized loans are designed to help those in financial need and don’t accumulate interest while in school or during any grace period.

How to reduce your loan costs

To reduce your overall student loan costs, there are a few simple actions you can take that might save you thousands of dollars over the life of your loan.

Only borrow what you need

While it may be tempting to borrow enough to cover all of your education costs—including lodging and food plan costs—it can cost you a lot more in the long run. If you have other savings or financial aid outside of student loans, it’s better to use those funds and only borrow the amount you need to cover school costs.

Work during school

If you can find a way to work during school—including the summer months—you can drastically lower your total loan costs. Finding a work-study program or a part-time job near your campus will enable you to make some loan payments while still attending school. This can drastically cut down your total amount borrowed and pay off loan balances before you graduate.

Make interest payments while in school

At the very least, making interest payments on unsubsidized loans while in school is a good idea. This prevents the interest on your student loans from accumulating and ultimately stops the accumulated interest from capitalizing. This means you can graduate with a much smaller loan balance than a borrower who defers all payments until after graduation.

TIME Stamp: You have options to keep loan balances under control

It’s hard for most borrowers to repay their student loans while in school full-time. Unfortunately, most student loans charge interest while you’re in school, and this can cause your loan balance to inflate over time. You might graduate with a higher loan balance than you initially borrowed, which can be shocking.

But you can combat this by electing to make interest payments while in school, which might be less than $100 per month. This stops interest from accruing and being added to your student loans when you graduate. There are several other reasons your loan balance might grow—from income-driven repayment plans to missed payments to loan consolidations. Always explore your options with a Federal Student Aid representative or loan servicer.

Frequently asked questions (FAQs)

How can I reduce my student debt?

There are several ways to reduce your student loan debt. Options include making interest payments while in school, avoiding late payments and loan default, maximizing eligible subsidized loans, and paying down your loans faster than scheduled after graduation. These actions will reduce the amount you pay overall for your student loan debt.

What increases your total loan balance?

Several factors can increase your federal student loan balances. If you have unsubsidized federal loans and don’t make any payments while in school, interest will accrue the entire time and be added to your loan balance after graduation.

Also, if you elect an income-driven repayment plan with very low payments, the interest charges may be greater than your monthly payments and cause your loan balance to grow. If you miss payments or end up in collections, you may end up paying a lot in fees, making it harder to get caught up.

Why did my loan balance go up?

Your student loan balance is growing for several reasons, including deferred payments while in school, income-driven repayment (IDR) plans with very low monthly payments, and loan consolidation. In most cases, student loan balances grow when your monthly payment is lower than the interest charged each month.