More than half the population in the US relies on some type of loan at least once in their lifetime. Loans can be an absolute lifesaver when you are in dire circumstances, but they can quickly creep up on you.
Technically, you only start paying off student loans after you leave school, so no one worries about it while studying. However, the loan amount starts accruing the moment it is deposited in your account. Because the loan interests keep adding to the capital, people get shocked when they realize that their loan amount has kicked up even after several years.
What increases your total loan balance, and why does this happen?
Financial topics, including The Importance of Having a Life Insurance Policy and Homeowners Insurance, are burning topics for many people. But the issue of increasing the total balance of student loans does not get the platform it deserves.
So this post on what increases your total loan balance takes an in-depth look at the reasons behind this rising burden in the US.
Factors That Increase Your Total Loan Balance
According to a Forbes report, more than half of student loan borrowers face the issue of increased loan balance after more than five years. Whether you are from private, publicly funded, or for-profit colleges, increasing student loans account is a major problem accounting for more than $1.6 trillion in federal debt, which is a staggering amount.
Below are the reasons why your loans keep accumulating and compounding:
Extended repayment term
The Federal Student Aid states that the extended repayment term for student loans is from 12 to 30 years. Choosing the longest repayment terms can seem like the best option since you pay the lowest amount every moment.
However, this can be a vicious cycle of paying interest to the lenders without making any progress in chipping away at the loan capital. In addition, loan interests keep accumulating, which is one of the main reasons your loan balance gets bigger than the initial amount.
Making less payment than the required amount
Another factor that kicks up the total amount of your loan balance is when you repay a lesser amount than the lender requested. Most financial lenders, especially private institutions, might allow you to pay lower than the required amount for some time. This way, financial lenders make an extra buck because you simply pay the interest amounts without touching the principal amount, meaning your loan amount keeps increasing steadily.
Delaying monthly loan payment
Usually, immediate repayment of student loans is not a requirement, which is one of the reasons why your total loan balance is bigger when you graduate. Whether you repay your loan or not, the capitalization on your loan does not stop.
In addition, delay in monthly repayment of loans is also inevitable after you leave college. And this can also add to your total loan balance.
Repayment based on your income
Repayment terms based on your income are usually related to federal student loans. Instead of the capital amount of loans, the repayment terms are strictly based on how much income you bring in every month.
This type of income-based repayment is very tempting and may appear to be an easier route. But the repayment amount is insufficient to clear the interest rates, let alone the capital amount.
Abuse of forbearance/grace periods
Another major factor that adds to your total loan balance is taking undue advantage of grace or forbearance periods. Financial institutions usually allow students up to six months after the last college course to find a job before they can start the loan repayment.
The problem, however, is that interest rates keep accruing when you extend this grace period and do not start the repayment as soon as the grace period is over. Keep in mind that the interest rate of your student loans also keeps accruing even as you take it easy during forbearance.
Calculation error from lenders is a rare but not uncommon reason that can spike your total loan balance. Mixing up the accounts, system and algorithm errors, and adding the wrong payment amounts can lead to this problem.
Always keep an eye out for a sudden increase in the loan balance, even if you are regular with your repayments. In this regard, financial documents, copies of loan statements, and all transactions can be indispensable proof in case of such an error. Having a good knowledge of Claims Information will also be very helpful.
Filing a complaint Consumer Financial Protection Bureau CFPB is also an option if you encounter this problem with loan lenders.
Pro Tips to Prevent Your Total Loan Balance From Increasing
Repaying loans without making any considerable progress can feel futile. If the amount of your student loans is considerably high, it can be even harder.
However, with the right strategies and consistency, you can prevent your total loan amount from getting out of control.
Pay extra with every installment, even if it is just a few dollars. It doesn’t have to be a significant amount, but paying more than the allocated funds for the loan repayment is one of the best moves to prevent your loan balance from increasing.
Confirm with the lender that they are in the loop if you choose to pay extra. In addition, extra payments can also be allocated to higher-interest loans if you talk to the lenders, and it can be a great help.
Set automatic payment options
Activating automatic payment options can significantly reduce the interest rates of your loans. In addition, most financial institutions and lenders offer up to a 0.25% reduction in the loan interest rates when you opt for automatic payment, which can also help keep your total loan balance in check.
Focus on paying off the high-interest loans first
For most people, student loans are among the most expensive, with high-interest rates, so focus on paying them off first. Repaying student loans should be a priority since you can’t escape this even if you declare bankruptcy. For federal student loans, you might be able to apply for a loan forgiveness program, but it is only temporary so repay it as soon as possible.
Finally, before securing a student or any type of loan, always shop around for loans with lower interest rates and borrow only the amount you need.