Many Student Borrowers Owe More Now Than When They Started Paying – Here’s Why

0

iStock.com

When you make monthly loan payments, you expect the balance you owe to decrease. For many student borrowersThis is not the case.

In 2021, nearly two out of three student borrowers who made voluntary payments during the COVID-19 payment pause ended up owing a larger balance than when they started, according to a report from the National Consumer Law Center and the Center for Responsible. Lending.

Learn: 10 items that are always cheaper at Sam’s Club
After: 7 Surprisingly Simple Ways to Reach Your Retirement Goals

But they are not alone. As states cut funding for higher education, tuition costs rise and land on the shoulders of students and their families.

More and more students now rely on loans to complete their higher education, and student loan balances can increase for a number of reasons. Here are a few to watch out for.

Outstanding interest

When you take out a loan, you agree to repay it with interest. But some options for borrowers have hidden consequences.

It is important to remember that interest will always accrue over time. And whenever you have unpaid interest left, it will be capitalized or added to the principal amount you borrowed.

Live updates: Financial trends, financial news and more

Periods of “grace”

School deferment is an option often used by student borrowers. But after graduation, temporary breaks in payments can increase the amount they will ultimately pay.

If you are temporarily unable to make your student loan payments, you can request a forbearance – a short-term pause on your student loan payments. But during this break, your loans may still earn interest.

During a forbearance, you can choose to pay the interest each month before it is capitalized. This will reduce the total cost of your loan. If you can, put some money aside in a savings account each week to cover the accrued interest on your loan at the end of the month.

Many borrowers choose to stop making payments altogether during forbearance periods. This will increase the original amount they owed.

If you’re racking up unexpected expenses, consider options that could lower your monthly payment before requesting a full suspension of your payments.

Longer repayment plans

Some federal student loan repayment plans don’t focus on immediately paying off the principal balance you owe.

The extended repayment plan allows you to repay your loans over a period of 25 years instead of the usual 10 years. If you opt for an extended graduated plan, your monthly payments will start lower and increase every two years or so. This option can be useful for recent graduates who are still applying for a job or who have less disposable income to start with but plan to earn more money in the future.

However, at the start of the extended phased repayment plan, payments are made on accrued interest on the loan – not on the principal loan itself. This means you will end up paying more than you originally borrowed over time.

If you need a lower monthly payment, you can see if you qualify for an income-contingent repayment plan or an income-contingent repayment plan. Although these plans will continue to accrue interest over time, they are specifically designed to depend on your income level and may even offer interest benefits on subsidized loans.

After making payments for 20 to 25 years on income-driven repayment plans, the rest of your student loan debt might even be forgiven. You will only be taxed on this remaining balance in the next year’s tax return.

Negative damping

Negative amortization is a kind of last resort in loan repayment. This happens when you reduce your monthly payment to an amount less than the interest you are charged for that month, such as the minimum payment on a credit card. Although it feels like you’re climbing that hill and making monthly payments, that remaining interest is still capitalized into your original balance. This is why the amount you owe always increases at the end of each month.

But that’s not all. This new higher balance you just accumulated comes with higher interest, which could also increase your monthly payment.

If you’re in a tight spot, talk to your student loan officer about options that might prevent a significant increase in your overall balance and monthly payments.

More from GOBankingRates

This article originally appeared on GOBankingRates.com: Many Student Borrowers Owe More Now Than When They Started Paying – Here’s Why

Share.

Comments are closed.