The weight of student loan debt is enough to deal with without it growing unnecessarily. It’s important to be aware of the factors that increase your debt and how to avoid a situation where your balance has grown beyond your control. You can find information below about the ways that your outstanding balance can increase, sometimes even when you are making regular payments.
The context of student loans in the United States
Student loans are a burden for millions of Americans who are faced with paying off the high cost of tertiary education after studying. In previous years, statistics show that up to 70% of higher education students have had to fund their studies, either in full or partially, by getting into some form of debt.
Research indicates that students with loans to pay back increases the rate of completion of the courses and students go on to earn more in their careers, but this comes with a price in the form of debt. In 2024, the total student loan debt held in the United States was $1.7 trillion and the average amount owed by borrowers was $38,000.
President Joe Biden made 150,000 Americans’ lives a lot easier by canceling their student loan debt. The Democratic Joe Biden-Kamala Harris administration made a point of addressing the crippling debt that many students are living under after borrowing money to fund their education, but this is highly unlikely to be a priority with Donald Trump at the reins of the United States.
What causes your student loan debt to increase?
Many borrowers assume that once they take out a student loan, their balance will only decrease as they make payments. There are several factors that can impact your debt balance and cause it to grow, which make repaying it even more difficult. In some cases, this can happen even when you’re making regular payments or have a payment plan in place.
Accrual of interest
Adding interest to loans either daily or monthly is standard procedure. But when loan holders are in deferment, forbearance, or on certain repayment plans, the interest that goes unpaid starts to capitalize, meaning that interest becomes due on interest, adding to the capital amount.
Recent changes in US policies have been effected that are intended to curb interest capitalization under specific conditions. However, interest still applies during deferment, grace periods, and income-driven repayment plans. The exception is when the government covers the interest on subsidized loans.
Forbearance or deferment
Student loan balances can increase significantly under forbearance or deferment. Subsidized loans may remain interest-free under deferment, but private loans will continue to accrue interest, and this increases the total balance.
Forbearance, which some people turn to for help when experiencing financial hardship, does not halt the accumulation of interest. A large number of borrowers who choose forbearance discover that their loan balance has grown while payments weren’t being made.
SAVE, PAYE, REPAYE, and IBR are income-driven repayment plans that allow borrowers to make monthly payments based on what they earn each month. While these plans make repayment more affordable, if the payment amount is low, it may not even cover the monthly interest. This leads to negative amortization under income-driven repayment plans, where the total debt continues to grow.
Late or missed payments are the biggest problem
Failure to make payments on time or missing payments entirely can lead to late fees and capitalized interest. The unpaid amounts will add up quickly and the amount due will increase.
Borrowers who miss payments for several months may see their balance ballooning, making it even harder to get control of the payments later down the line.
Debt holders who are struggling to keep up with their payments should speak to a professional about their options to reduce the monthly amount or strategies to manage their debt better and pay it off faster. Unfortunately, Joe Biden’s loan forgiveness programs are coming to an end after his four years as leader of the United States.
Read the whole thing?
Get the week's signal, not the noise
Our sharpest reporting on energy, climate and nature — free, once a week.
