5 factors that increase your total student loan balance

Factors like accruing interest, capitalization, and even the type of repayment plan you use can all contribute to rising student debt.

Interest accrues on your student loans daily, and if your monthly payments aren’t enough to cover the interest, it may also capitalize in certain instances. When capitalization occurs, any unpaid interest is added to your loan’s principal balance. Interest will then accrue on this new, larger balance — and you essentially start paying interest on your unpaid interest. 

Staying informed about what increases your total loan balance can help you avoid it in the first place. Here's what to watch for. 

1. Deferment

Deferment is a temporary pause on your student loan payments, typically available for federal student loans while you’re enrolled in school at least half-time or for six-months after graduation, known as the grace period. You can also apply for deferment during periods of financial or medical hardship, among other circumstances. 

Although deferment can provide financial relief, it's important to note that interest usually continues to accrue on your loans during this time and it may be capitalized once deferment ends. This means the interest accrued is added to your principal balance, increasing the total amount you owe. However, Direct Subsidized Loans are an exception, as the government covers the interest during school enrollment and the grace period.

Let’s say you borrowed a $5,000 loan at a 6% interest rate for each year you attended school. If you didn’t start making payments until 6 months after graduation (which is the standard grace period), here’s what you’d pay over your loan’s lifetime:

Even though you only borrowed $20,000, you’ll owe more than $23,000 by the time you make your first payment. And as interest continues to accrue over 10 years of repayment, you’ll end up paying nearly $11,000 in total interest.

2. Forbearance

General forbearance allows you to pause payments on your federal student loans for up to 12 months. During this time, interest continues to accumulate and typically capitalizes at the end of the forbearance period, meaning the accrued interest is added to your principal balance. This is true for almost all types of federal student loans except Federal Perkins Loans. 

Private lenders may also offer forbearance, though their terms are often less flexible, and they may charge a fee to initiate a forbearance period.

3. Income-driven repayment plans

You might see your loan balance increase if you’re enrolled in a federal income-driven repayment (IDR) plan, which reduces your monthly payments based on a percentage of your income. 

For example, let’s say you enrolled in an IDR plan with a monthly payment of $50. However, for this period, a $60 interest charge was applied based on the unpaid total balance. Since your payment doesn’t cover all your accrued interest, this repayment plan results in $10 of interest charges remaining on the account. In this case, your loan’s balance can grow, even though you’re making regular payments each month.

Here’s how your student loan balance can grow under each income-driven repayment plan, based on each plan’s unique rules: 

• Saving on a Valuable Education (SAVE): Any interest not covered by your monthly payment doesn’t accrue if you have subsidized and unsubsidized loans, meaning your total balance won’t increase under the SAVE plan. 
• Pay As You Earn (PAYE): The government covers any unpaid interest for the first three years after you enroll. After this period, any remaining interest will begin to accrue. If your monthly payments under PAYE aren’t enough to cover the full amount of accrued interest, you’ll be responsible for paying the accumulating interest. 
• Income-Based Repayment (IBR): IBR also provides an interest subsidy for the first three years you are enrolled. If you remain in the plan, interest doesn’t capitalize unless you either fail to recertify your income by the deadline, no longer qualify based on your income, or choose to leave the plan. If you exit IBR or don’t meet these requirements, the accrued interest will capitalize, increasing your overall loan balance.
• Income-Contingent Repayment (ICR): Unpaid interest not covered by your monthly payment accrues and you’ll be responsible for all of the interest charges. 

Related: PAYE vs. SAVE: Compare your options

4. Consolidating federal loans

Consolidation combines your federal student loans into one loan with a single monthly payment. This process can help borrowers lower their monthly payments by extending their repayment period (up to 30 years depending on how much you owe), and can make you eligible for federal loan forgiveness programs. 

When you consolidate, any unpaid interest on your previous loans gets added to the principal loan balance of your new Direct Consolidation Loan, increasing the total amount you owe. Additionally, extending your repayment period through consolidation can also result in more interest accumulating over time, despite more manageable monthly payments.

5. Fees

It’s common for lenders to charge fees, and sometimes these are added to your loan’s balance. While student loan lenders can’t charge you prepayment penalties for paying off your loan early, they can charge other types of fees that can make your loan balance rise.

• Origination fees: Some lenders charge this fee when the money is sent to you. Origination fees don’t increase your loan balance, because they’re typically deducted upfront when loans are disbursed. However, you may have to borrow more to cover this fee, and you’ll still pay interest on the amount you’re charged.
• Late fees: This is a flat fee or percentage that’s charged when you don’t pay by the due date. These are typically about 5% of your missed payment amount.
• Insufficient funds fees: When the account you’re making a payment from doesn’t have enough money to cover the amount due, some lenders charge a returned payment fee. Typically, it’s a flat fee.
• Collection fees: If you default on your federal or private student loans, the debt might be assigned to a collection agency. The agency can impose hefty collection fees that are added to the unpaid loan balance.

How to avoid increases to your total loan balance

Although you might not always be able to avoid increases to your loan balance, there are strategies to minimize the effect:

Make interest-only payments while in school or deferment

If you have unsubsidized federal or private student loans, you can avoid capitalized interest on your loan balance by making interest-only payments while your loan payments are paused. If you pay off the interest while your loan is deferred, it won’t be added to your principal balance when it’s time to make regular payments.

Change your repayment plan

Calculate whether your current repayment plan is costing you. Your payment might be too low, resulting in unpaid interest each month. Or perhaps you have an unnecessarily long loan term, keeping you in debt for longer and costing you more in interest.

The Federal Student Aid loan simulator can help you compare the costs and potential savings of different plans. Or you can use a student loan calculator to see how much interest you’ll pay overall.

However, you might find that the benefits of your existing plan are worth a growing loan balance. For example, if you’re pursuing Public Service Loan Forgiveness, a higher loan balance may not matter since the remaining amount can be forgiven after you complete the required payments.

But if you’re not seeking loan forgiveness and your financial situation has improved since you last evaluated your repayment strategy, explore whether another plan can lower your loan costs by paying off your debt faster.

Take advantage of interest rate discounts

Most lenders offer interest rate discounts to incentivize borrowers to enroll in automatic payments. This helps lenders secure payments in a timely manner, and borrowers typically receive a nominal rate discount of 0.25 percentage points. Although it doesn’t look like much, over your loan term this discount can result in significant savings.

Make extra payments

If you have some spare cash and can afford to make extra payments, doing so lowers your loan balance faster and you’ll incur less interest overall. When making extra payments, ask your lender to apply 100% of the added cash toward your principal balance. This way, it isn’t applied to the next cycle’s accrued interest or fees and can lower your balance faster.

Refinance your loans

When you refinance student loans, a private lender agrees to pay off your original loan balance and creates a new loan in its place. This strategy is useful if the new lender offers a better interest rate, lower monthly payment, or other perks. And depending on the terms of your old and new loans, it can offer thousands of dollars in savings.

Refinancing private student loans comes with relatively few trade-offs, but carefully consider before refinancing federal loans. You’ll lose access to government programs and protections, including IDR plans, loan forgiveness opportunities, and more flexible deferment and forbearance. Refinancing is not reversible, so make sure you won’t need those federal perks before taking action.