We were students before, and some of us just got done being students and are taking on the responsibilities associated with paying off debts. 

What increases your total loan balance? It’s the burning question of all recent grads.

Interest is the most significant factor to watch out for when considering what increases your total loan balance. 

Let’s learn how we can avoid these situations.

Learn How Interest Functions

When understanding what increases total loan balance, we must know how private student loans interest works. 

Interest begins accruing the second your loan is doled out. So, even if you don’t make payments until your education is complete, you are slowly increasing that balance. Interest will still compound during forbearance/deferment.

The closer you get to starting repayment, the interest is capitalized via the loan lenders or student loan balance services. 

To avoid this, opt for subsidized federal student loans. 

They are for students that demonstrate a financial necessity and are limited to $5500 per year (depending on which year of study you’re in) and $23K.

When students utilize these loans, the federal government pays the interest. They will also pay the loan interest during grace periods/deferments.

You can also mitigate what increases your total loan balance by making payments when not required. You’ll steer clear of paying compounding interest when payments formally begin.

What Increases Your Total Loan Balance: Understanding Capitalized Interest

Earlier, we mentioned, avoid paying capitalized interest, and that means in greater detail. 

Let’s assume you borrowed $5000 for your first year of schooling. The loan will not come due until six months after you’ve graduated. Assuming it takes four years to graduate, you’ll accrue interest for 54 months. 

With a 4% interest rate, you’ll be paying about $17 a month in interest. Across 54 months, that adds a whopping $918 to your loan total. So, what could you do with that money? 

Imagine this interest rate across ten years of debt repayment. Across a 10-year loan, that’s $2,040!

You can pay off the interest monthly to avoid capitalization while in school. That way, the balance will be kept at $5000 when you begin repayments. 

You’d need to repeat this process for every loan taken out while in school- it will net you the most savings and help prevent interest capitalization, which increases your total loan balance.

What Increases Your Total Loan Balance: Income-Based Repayment

When using a regular federal student loan borrowers repayment scheme, the balance becomes amortized across a pre-set repayment schedule. 

Using this arrangement, one part of the payment goes toward repaying, how much interest you accrued since you paid last, while the remainder helps pay down your loan’s principal balance.

Using an income-based repayment plan could drive up the monthly cost. This plan is calculated using a percentile of your income. It reviews the differences between one’s annual income and 100/150% of the poverty guidelines for your state and family size.

Depending on your loan balance, payment amount, and interest rate, your payment may not cover the interest that accrues each month. 

Although you’re making monthly payments you can afford, the interest will continue to compound. 

Income-based repayment period terms could increase your balance to 20-25 years; once the term is complete, all remaining balances get canceled. 

Therefore, if your income won’t go up a ton over time, you don’t have to worry about that balance increasing. 

But, if you know, you’ll be out of your low-income scenario in a short time and your income increases to where it cannot be forgiven, these payments will be more costly long-term.

Decreasing The Amount Paid

You can prevent what increases your total loan balance by following a few of our guidelines. 

Use these ideas to help you save money on what you’ll pay in total for your loans. 

  • Take Fewer Loans Out: Check out other ways you can pay through school, so you don’t need to borrow so much. For example, work part-time, do a side hustle (or both), apply for a grant/scholarship, or ask family for help. 
  • Check Out Private Loans: Going to a local bank may help you get a lower interest rate for undergrad and graduate-level loans. 
  • Discounts On Interest Rates: Some services provide discounts on interest rates for doing various things with your loan, such as using autopay, having existing products with the bank or credit union, and repaying your loan on time. Review with your servicer/lender to see if there are chances to save money.
  • Refinancing Student Loans: Refinancing the loans once you’ve graduated school may help you reduce interest and save money overall on your interest. Such rates are based on your credit score; some of you might need to enlist a co-signer to help you achieve those rates. 

With some hard work and ingenuity, you can avoid what increases your loan balance. 

Other things you can do to avoid accruing massive amounts of student loan servicers debt (and subsequently, interest): 

-Think long-term. It might sound funny now to go off to faraway school but think of what you can save by living nearby or with family for free, attending an in-state public university, and bringing your food instead of spending big money at a campus dining hall. 

You’ll have your entire life ahead to travel and make friends- don’t start your life thousands in debt. 

-Consider a work college. These educational institutions offer reduced or free tuition if you work at their campus/at one of their off-campus jobs. Here are nine recognized work colleges to consider. 

Conclusion: What Increases Total Loan Balance?

What increases your total loan balance can best be summed up in accrued interest. It’s a fact of life but a huge pain point for those who want to obtain a degree to work in their field of choice, make more money, and enjoy a secure future.

A little planning and sacrificing go a long way in avoiding unpaid interest because that’s what increases your total loan balance. 

Borrow what you need to get by, and trim expenses where you can. As a wise man once told us, “Live like a student now, so you don’t have to when you graduate.”