What Increases Your Total Loan Balance? How Your Student Debt Can Grow

It’s easy to assume that the balance of your student loan will always go down — or at least stay the same — over the life of your loan. Making payments to your student loan should reduce the amount you owe, right?

Unfortunately, this isn’t always the case. There are several factors that can increase your loan balance, even as you work to pay off your student loan. Here’s what you need to know about what increases your total loan balance. 

1. Interest accrual

Nearly all student loans charge interest to borrowers. Generally, interest starts accruing as soon as the loan is disbursed. Interest usually accumulates on a daily basis, and if it’s not paid off, the accrued interest can be added to your loan balance. 

For example, let’s say you have a student loan of $20,000 with a fixed 7.05% interest rate. You’re not required to make payments for nine months, but the interest accrues over that period. Your accrued interest equals $1,058 after the nine-month grace period, and you’ll now owe $21,058 before you’ve even entered repayment.

Whether you have a fixed or variable interest rate will also affect your interest accrual. A fixed interest rate remains the same over the life of the loan, while a variable rate can fluctuate over time. A borrower can easily calculate the amount of interest that will accrue with a fixed rate student loan, but it’s impossible to know for sure what the variable interest accrual will be. 

2. Interest capitalization

Interest accrual is when interest accumulates on your account. But that’s not the only way that interest can increase your loan balance: Student lenders can capitalize that accrued interest, which means it’s added to the principal of your loan. That means you’ll now begin paying interest on your accrued interest.

Lenders usually capitalize interest after certain trigger events, such as the end of a deferment or grace period. In the example above, the borrower with a $20,000 loan may see $1,058 of interest accrue during the nine-month grace period, but it doesn’t capitalize until the end of the grace period.

At that point, the principal becomes $21,058 and the borrower will owe 7.05% interest on the new principal. If the borrower is on a standard 10-year repayment plan, the capitalized interest will increase the monthly payment and lifetime cost.

Related: Student Loan Repayment Calculator

You can avoid interest capitalization by paying off interest as it accrues, even if you’re not required to make a payment. Making interest-only payments, or any amount that you can afford, will reduce or eliminate the amount of interest that accrues during the nonpayment period — and you can keep the accrued interest from capitalizing.

3. Fees

Student loans can come with a variety of fees and penalties that could increase your total loan balance. Some of the most common fees include:

• Origination fee: This is an upfront fee that’s charged by the lender to process the loan. Origination fees are deducted from the loan balance when your funds are disbursed. For example, if you borrow $10,000 and your lender charges a 2.5% origination fee, the lender will take $250 from the principal when it disburses the money. You’ll receive $9,750, but you’ll still have to repay the full $10,000. While origination fees typically don’t increase your balance, you may need to factor it in when deciding how much to borrow.
• Late fee: If you miss a due date, you may have to pay a late fee. The amount can be a flat rate or a percentage of the missed payment. In either case, if the late fee is added to your total loan balance, you’ll pay interest on this fee for years to come.
• Nonsufficient funds (NSF) fee: If you submit a payment but don’t have enough money in your account to cover it, many lenders will charge you an NSF fee for the returned payment. Like late fees, an NSF fee may be added to your total loan balance if you don’t pay it right away.
• Collection fee: You may face collection fees if you default on your loan. Defaulting typically means not making a scheduled payment for at least 90 days on a private loan or 270 days on a federal loan. Once your loan is in default, your student loan debt enters collections, and collection fees can be added to the loan balance.

The best way to avoid student loan fees is by making consistent, on-time payments. If you’re ever in a position where you can’t afford your monthly payments, contact your lender as soon as possible to discuss your options. You can often avoid unnecessary fees if you proactively contact your lender during periods of economic hardship.

4. Deferment, forbearance, and grace periods

Deferment, forbearance, and grace periods are all different authorized periods of nonpayment. While your loans are essentially paused during this time, borrowers can expect interest to continue to accrue. However, the interest usually won’t capitalize until your loan reenters active repayment.

This means borrowers can avoid increasing their total loan balance by making interest-only payments during periods of nonpayment. Even if you can’t afford the interest-only payment, setting up an automatic monthly payment of as little as $25 can reduce the amount of interest that accrues and capitalizes when your regular payments resume.

5. Your repayment plan

Borrowers on the standard 10-year federal repayment plan will see their loan balance gradually go down over time — but that’s not necessarily the case with income-driven repayment (IDR) plans.

That’s because IDR plans base your monthly payment on factors like your discretionary income and family size. For some borrowers, that monthly payment isn’t large enough to pay the accrued interest for each billing period. In that case, even borrowers making consistent payments every month can see their loan balance get larger and larger over time.

This is why IDR plans offer loan forgiveness after 20 or 25 years. If you still have a balance after making the required payments, you’re not responsible for repaying what’s left.

However, borrowers considering an IDR payment should review the plan to see how much they’ll pay over the life of the loan. Federal Student Aid's loan simulator can help you understand exactly how your repayment plan will affect your total loan balance and interest costs over time.

How to reduce your loan costs

Even though your total loan balance can increase because of the above factors, you still have control over your loan costs. Here are some strategies that can help you reduce the total amount you pay for your student loans:

• Pay more than the minimum: Sending in more than your monthly payment — and letting your lender know you want the excess cash applied to the loan principal — can lower your total loan balance, reduce your interest costs over the life of the loan, and shorten your repayment period.
• Make extra payments: If you don’t have enough cash to regularly pay more than required, you can instead send in an additional payment if you have extra money from a work bonus, tax refund, or other windfall. Doing so can also help reduce your total loan balance, total interest paid, and repayment period. Just be sure to let your lender know you want the extra payments applied to the principal.
• Lock in discounts: Many lenders offer interest rate discounts for things like enrolling in autopay or opening another account with the same lender. Lowering your interest rate, even by a modest amount, will reduce how much you pay over time.
• Make interest-only payments while in school: Preventing your accrued interest from capitalizing can offer major savings. The best way to do this is to make interest-only payments even when no payment is required, such as while you’re in school.
• Refinance your loans: If you can qualify for a lower interest rate than you currently pay, refinancing your student loans could offer significant savings. Just remember that refinancing federal loans means you lose out on federal protections and benefits, such as loan forgiveness programs, income-driven repayment, and more flexible deferment and forbearance.