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Why Do My Student Loans Keep Rising and What Can I Do?

Why Do My Student Loan Balances Keep Rising & What Can I Do?
Rebecca Safier
Rebecca SafierUpdated August 31, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
As you pay back your student loans, you expect to see your balance decreasing over time. Unfortunately, there are scenarios when your balance could go up instead. Understanding what increases your total loan balance for student loans — and how you can prevent it from rising – can help you better manage your loans and make progress toward a $0 balance. Keep reading to learn why your student loan balance may increase, strategies to address rising student loan balances, and what you can do to prevent this from happening.

Understanding Why Student Loans Increase

There are a few reasons why your student loans might keep going up. Here are a few costs that can add to your balance. 

Interest Accrual

If you’re wondering why your loan payoff is higher than your balance, student loan interest may be the culprit. Student loan interest accrues on your balance at a fixed or variable rate, depending on your loan. Due to interest, you’ll pay back a higher amount to your lender than you initially borrowed. Let’s say, for instance, that you borrow $10,000 at a 5% interest rate. Over 10 years, you’ll pay back both the $10,000 loan and an additional $2,728 in interest charges. 

Capitalization of Interest

Not only does interest accrue on your student loans, but that interest is then added onto your principal balance, where you then pay interest on your interest. This is known as interest capitalizationThere are a few scenarios when interest capitalizes on your student loans, including: 
  • At the end of a grace period, deferment, or forbearance 
  • After leaving an income-driven repayment plan 
  • When you consolidate federal student loans 
  • Every year on the Income-Contingent Repayment plan 
Interest capitalization can make paying off a student loan even more expensive. Interest will accrue on your new, higher balance, meaning you’re essentially paying interest on top of interest.

Fees and Penalties

Fees and penalties can also cause your student loan balance to increase. Many lenders charge late fees, for example, if you don’t make your payments on time. You might also be penalized for insufficient funds in your account. A lender may add these fees to the following month’s student loan statement, meaning you’ll have to pay even more the next time you make a student loan payment. Recommended: Student Loan Fees: What You Need to Know

External Factors for Continuous Increases in Student Loans

There’s another factor that could be causing your student loan balance to increase that’s not in your control — having a variable interest rate. Variable rates change with market conditions. If your rate goes up, you’ll see your interest charges and total amount owed increase, as well.Over the past year, for instance, the Federal Reserve has been continuously raising rates on lending products. If you have a variable rate on a student loan, you may have seen it increase multiple times throughout 2022 and 2023. Federal student loans have fixed rates that stay the same over the life of the loan. However, some private student loans have variable rates that can fluctuate. If you have a private student loan with a variable interest rate, there’s no way to predict exactly how much interest you’ll pay over time. If you want to protect yourself from rising rates, you could consider refinancing your variable-rate private student loan for a fixed-rate loan. That way, you’ll have predictable monthly payments and a clear sense of how much interest you’ll pay over the course of your repayment term (barring any late fees or other penalties). Recommended: How Student Loan Refinancing Works

Deferred Interest During Grace Periods or Forbearance

If you pause payments on your student loans through deferment or forbearance, interest may continue to accrue on your balance, causing it to grow. Once you enter active repayment, that interest will capitalize, or be added onto your principal amount. The only exception to this rule is federal subsidized loans, which don’t accrue interest during your grace period or other periods of deferment. However, unsubsidized loans and private student loans do accrue interest during any period of paused payments. If you want to avoid a ballooning balance, you could consider making payments while you’re in school and avoiding additional periods of deferment or forbearance unless absolutely necessary. Note that the emergency forbearance that’s been in place since March of 2020 is an exception to this rule. Federal student loans were paused at 0% interest, so you don’t have to worry about your balance increasing during this time. Interest is set to resume in September and payments will be due starting in October 2023. 

Income-Driven Repayment Plans

You may also see your student loan balance increase over time on an income-driven repayment plan. Income-driven plans adjust your loan payments to a percentage of your discretionary income. That amount may or may not be enough to keep up with interest charges on your student loans. If it’s not, you could see your balance increasing, even as you’re making payments from month to month. This is known as negative amortizationThe government does offer an interest subsidy on some plans, which can help prevent your balance from ballooning. As mentioned, though, you may also be subject to interest capitalization if you leave a plan or are on Income-Contingent Repayment. There is a light at the end of the tunnel, though — if you still owe money after 20 or 25 years on an income-driven plan, the government will forgive the rest. 

Lengthy Repayment Terms and Extended Plans

Extended repayment plans can have a similar problem. While you’ll eventually pay off your balance, you’ll spend more money on interest the longer you’re in debt. Let’s revisit that example of a $10,000 loan at a 5% rate that costs $2,728 in interest charges over 10 years. If you extended your loan terms to 25 years, your interest charges would increase to $7,538. 

Strategies to Address Rising Student Loan Balances

Now that you understand what increases your total loan balance for student loans, how can you address this issue? Here are some strategies that can help. 

Take Control of Interest Accrual

First, consider ways you can cut down on interest accrual. If you’re still in school, perhaps you can make small or interest-only payments during your grace period. Even though payments aren’t due yet, making them anyway could prevent your balance from ballooning. Avoid periods of deferment and forbearance unless absolutely necessary, since interest could continue to accrue during this time. If you can afford to make extra payments on your loans, you could pay them off faster and cut down on interest charges. If you’re on income-driven repayment, remember to recertify your plan on an annual basis. If you forget to recertify, you could accidentally trigger interest capitalization, making your loan more expensive. 

Exploring Repayment Options and Loan Forgiveness Programs

Research your various options for repayment to determine the best plan for you. Federal Student Aid offers a useful Loan Simulator tool so you can compare your monthly payments and total interest costs on each plan. Explore options for student loan forgiveness, too, to see if you could qualify for any program. Public Service Loan Forgiveness, for example, forgives student loans for public servants after 10 years of service. You can also check with your state and employer to see if they offer any student loan repayment assistance that could help you pay off your loans faster. 

Seeking Financial Counseling and Guidance

Everyone’s situation is different, so it may be worth seeking guidance from a financial counselor. A student loan counselor can help you come up with a plan of action that’s customized to your specific situation. If you’re feeling overwhelmed by your student loans, speaking with an expert could help you understand your options and manage your debt. 

The Importance of Staying Proactive with Student Loans

It’s important to stay proactive with your student loans, especially if you’re noticing your balance increasing. If your balance isn’t going down, that usually means your monthly payments aren’t covering the interest charges from month to month. This situation may not be a problem if you’re working toward loan forgiveness. If you’re not, however, you’ll want to get out of this negative amortization and figure out how to reduce your balance so you can eventually become debt-free. Recommended: 7 Easy Ways to Lower Your Student Loan Interest Rate

The Takeaway

If your student loan balance is increasing due to a high or variable interest rate, you may be able to lower it. One of the best ways to lower student loan interest rates is through refinancing. Plus, refinancing lets you choose new repayment terms that work with your budget. Keep in mind, though, that refinancing federal loans turns them private, so it wouldn’t be a smart move if you want to retain access to federal repayment plans, federal forgiveness programs, or other benefits. Consider both the student loan refinancing pros and cons before you apply.If you decide refinancing is the right move for you, Lantern can help you find student loan refinancing offers from leading lenders. 

Frequently Asked Questions

Why was my federal student loan rate so high?
Why does my student loan payment keep increasing?
Why did my student loan payment double?
Why is my student loan payment different each month?
Photo credit: iStock/anilakkus

About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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