Why did my student loan balance increase?​

A large and sudden increase in your student loan balances can be shocking and negatively affect your future financial goals and current financial situation. Understanding the reasons your student loan balance increases can help prepare you for the change and give you the knowledge to avoid surprise increases. 

Here’s why student loan balances increase for both federal and private student loans. 

Primary reasons your student loan balance is growing

Some reasons your loan balance may grow are interest capitalization, negative amortization or a period of grace, deferment or forbearance ending. 

Unpaid interest capitalization

Interest capitalization occurs when any interest you have is added to your loan balance. Because your interest is added to your loan balance, all future interest will be based on this larger balance amount. When your interest is capitalized, you will notice your loan balance growing quicker. 

Unpaid interest capitalization can be triggered by switching repayment plans or exiting a grace period. 

Negative amortization explained

If your monthly payments are less than the interest on your student loans, what remains of your interest owed will be added to your loan principal. This will increase your loan principal and future interest amounts. Many borrowers could see this on Income-Based Repayment (IBR) and the Pay As You Earn (PAYE) plans. 

To help avoid negative amortization, you should keep an eye on your student loan payments and make sure they are moving in the right direction. You can keep an eye on your student loan payments with an online repayment tracker.  

Grace, deferment or forbearance periods

While you are in a grace, deferment or forbearance period, interest is typically accumulating but not added to your principal. After these periods end, if you did not pay your interest, your interest is added to your loan principal. Further interest will be based on this higher loan principal. 

Fees and penalties that add to your total balance

You should be aware of several fees and penalties that could increase your total loan balance. 

Late fees and missed payment penalties

Most student loan lenders will require a late or missed fee when you are unable to make your monthly payments. These fees are typically 25% of the monthly payment amount and will be added to your loan balance. Some federal loans do not charge a late fee. 

Collection costs and default fees

If your student loans are defaulted on and go to collections, your lender could add any costs associated to your loan principal. This amount could be anywhere from 18% to 25% of your remaining loan balance. 

Origination fees added at loan disbursement

Origination fees are one-time charges at the start of your loan that cover lender processing and setting up your loan. The fees are typically from 1% to 5% of your loan principal. Instead of having to pay these fees out of pocket, they are taken from your loan disbursement, meaning you will get less of your funds but will still have to pay the full loan amount. 

How to prevent your student loan balance from increasing

Here are a few ways in which borrowers could prevent or slow student loan balance increases. 

Pay interest while still in school or deferment

Many borrowers may notice their student loan balance increasing after graduation due to a lack of interest payment or deferment while in school. Making interest payments on your loans or getting a direct subsidized loan, which means the federal government makes your interest payments in school, can help ensure your student loan balance doesn’t rise after graduation.   

Make extra principal payments when possible

Making extra principal payments when possible can lower your overall debt, which interest payments are based on. Lowering your outstanding loan balance this way will help reduce the increase if your interest is capitalized. 

If you are going for loan forgiveness through an IBR plan, it might not make sense to make extra principal payments. 

Refinance your student loans to a lower rate

While refinancing your student loans to a lower rate won’t prevent your student loans from increasing, refinancing can slow it down. Getting a lower interest rate on your loan could reduce your monthly payments as well as the total interest paid over the life of your loan. However, refinancing federal student loans into a private loan could remove any federal benefits offered*. 

You can also extend your payment timeline to spread out your payments over a longer period when you refinance your student loans**.