If you’re thinking aboutopting for student loans to finance your college education, you’re not the only one. Roughly 70% of American college students utilize borrowing to meet the ever-increasing needs of their college education.
Now imagine you borrow from a federal or private lender to finance your college degree. You work tirelessly for four years and receive a degree that’s a culmination of your dedication, commitment, and several sleepless nights.
Once you graduate, you get a job and set up a budget to pay off your student debt. After 5 years of making dedicated payments, you check your loan balance and are left in stunned surprise!
Somehow, your loan balance is higher than it was when you took out the loan. If you’re lucky and your balance hasn’t increased for some reason, but it definitely hasn’t budged. Years of making monthly payments and they didn’t even seem to make a dent on your accruing student loan?
You’re not the only one experiencing this anomaly. Among the 44.7 million Americans living with student debt, increasing student loan balance is a common complaint.
Let’s review some of its most common causes:
You’ve delayed repayment
Considering the financial strain of loan repayment along with other expenses, it’s no surprise that people prefer to pause their loan payments sometimes. However, this may be causing your loan balance to increase, eventually becoming an even greater financial burden.
The two most common types of paused loan payments are forbearance and deferment, which almost 6 million borrowers were in just last year!
The former allows you to suspend loan repayment temporarily until you’re on a firmer financial footing to begin again. Whether you pause payments because of certain life commitments—like marriage—or in response to national economic turmoil, forbearance seems like a good way to take a break from your loans.
The latter—deferment—includes delaying your payments for some time, typically before you even make the first loan payment. This is ideal for people struggling to get a job right after graduating and allows you time to settle down. Some lenders allow a grace period of six months after you graduate and are required to start repaying your loan.
Since interest continues to accrue—especially in the case of forbearance and grace periods—the amount you owe will keep increasing.
You opted for a variable interest rate
While federal loans only offer fixed interest rates, private lenders give you the chance to opt for variable interest rates. These floating interest rates fluctuate as the underlying benchmark rate changes.
This type of interest rate comes with the risk of high monthly payments, but it also offers the chance to pay considerably lower than fixed interest rates would allow. If the interest rate falls, you can benefit from the low monthly payments and may even make larger contributions to reduce the loan balance.
However, if the variable interest rate increases, you could find yourself struggling to meet the interest rate payment itself. When you’re making hefty payments in the way of interest every month, you won’t be making any difference to the balance you still owe. The lack of stability offered by variable interest rate loans makes it difficult to plan ahead and stick to a repayment plan that delivers.
You’re on income-based repayment plans
Federal loans aim to ease the repayment process for borrowers, but they may be costing you in terms of longer repayment periods and a higher loan balance.Income-driven repayment plans are one such way federal lenders work to provide affordable monthly payments that depend on your income. Their four types are:
- Income-Based Repayment Plan
- Revised Pay As You Earn Repayment Plan
- Income-Contingent Repayment Plan
- Pay As You Earn Repayment Plan
Using these plans to pay off your loan debts seems like a good idea because it promises lower monthly payments that are determined by your income. However, this option isn’t as attractive if you’re hoping to save some money on loan repayment.
By capping monthly payments at 10%–20% of your salary, you face an extended repayment term with low monthly payments that only cover the interest while leaving your principal amount untouched. If your income is particularly low for some time, you might not be able to cover interest payments and they’ll be accumulated with your principal balance.
Interest was accruing while you were in college
Most student loans begin racking up interest before you’ve even graduated. As soon as the loans are disbursed, the monthly interest continues to add to your payable amount until the time you graduate.
This means that, while you were studying for four years at college, the compounding interest continued to build up and exponentially increase the amount you originally borrowed. Of course, you have the option to start making loan payments while you’re still in college, but many students don’t have the finances to make monthly payments before they start earning on their own.
While there’s one loan type—federal subsidized loans—that’s an exception to this rule, balance growth during college is a common phenomenon that all borrowers experience. In fact, compounding interest is a factor that often takes borrowers by surprise and leaves them wondering why their loan balance is increasing.
Your loan term is too long
The thought of graduating with the insurmountable burden of student debt ranging between $26,900 and $32,600 is enough to make you dread the repayment process. With such a challenge ahead of you and a new job that doesn’t pay as much, spreading your loan over a longer time period sounds like a good idea.
Most standard repayment terms are 10 years, giving you the chance to make smaller payments over the 120-month period. However, longer repayment terms can cost you more in the long-run while providing short-term relief. It may seem like a good idea to make small contributions each month when you can’t afford to pay your loan in hefty chunks, but that may lead to you repaying a larger balance.
The low monthly payments might just cover the interest rate you owe and leave your principal value untouched. Additionally, regardless of the monthly payments you make, interest will continue to accrue on your loan for years.
Taking out student loans can make your college dreams come true, but it can also become a worrying burden on your financing. To avoid debilitating stress from increasing student loan balances, you can take back control of your financial freedom through refinancing.
Education Loan Finance (ELFI) offers loan refinancing options that can help you turn your situation around. Swap out your existing loan with a new loan and get terms that are favorable for you. Their experts will guide you on the basics of student loan refinancing to get started.