Students and parents use the Free Application for Federal Student Aid (FAFSA) to determine eligibility for financial aid; grants and scholarships are popular forms of support that don’t need to be paid back.
Interest charges on loans often add to the principal, leading to an ever-increasing loan balance. Understanding what drives it can help you devise a strategy to avoid this fate.
As with credit cards and mortgages, loan lenders charge interest on your borrowed money. By paying on time and for the full amount due, your loan balance should go down over time; if not, missed payments or forbearance/deferment options may cause your balance to increase over time.
Your student account statement (SAR) may display two types of interest charges: accrued and capitalized interest charges. Accrued interest refers to any outstanding loan balance accrues accrued interest, while capitalized interest refers to adding your unpaid interest as part of the principal balance. When loans are disbursed, an origination fee may also apply.
Loan balances may increase as a result of interest accrual and capitalization; though this can seem inevitable, there are ways you can ensure they don’t spiral too high.
Pay your loans on time! Delinquent payments will be reported to credit agencies and may incur fees*, impacting eligibility for student loan forgiveness programs.
Be wary if your flexible repayment plan reduces monthly payments. This could result in higher overall loan balances due to insufficient amortization resulting from reduced monthly payments failing to fully cover interest charges for that month and leading to negative amortization. If you need clarity regarding how your flexible repayment plan works, contact your servicer and ask them for an explanation.
Periods of Deferment
Deferment is the term that borrowers use to refer to postponing loan payments. While deferment may help those struggling to afford monthly payments manage them more easily, it also increases total debt payments due.
Deferment differs from grace periods in that interest continues to accumulate; however, with federally-subsidized loans (Direct Subsidized and Federal Stafford Loans), interest is paid by the government during any deferment periods. Unpaid interest from other types of loans is capitalized and added back into the principal balance after a deferment period.
Different loan types come with unique deferment, forbearance and cancellation requirements and options. For more information about your specific type of loan, you can log into your Federal Student Aid account dashboard or reach out directly to its servicer.
High Credit Card Balances
Borrowers must ensure they do not take on more debt than they can comfortably repay. High credit card balances can increase your credit utilization ratio – one of the primary elements influencing VantageScore (and FICO) scores.
This ratio evaluates your card balances relative to their credit limits to assess how much risk you present to lenders. This number is pivotal in your credit score and should ideally remain below 30 per cent. Reducing card balances has an immediate positive impact on this figure; however, situations may still cause loan balances to grow despite repayment efforts being made.
Paying Less Than the Requested Amount
Student loan lenders charge interest on any money borrowed, like credit cards, mortgages and auto loans. When borrowers make timely payments on their student loans, their balances tend to decrease over time. However, if borrowers miss payments, lose forbearance or deferment, or only make minimum monthly payments, their ratios increase instead.
Loan balances increase for various reasons, most significantly due to interest capitalization. When borrowers pay less than requested by their lender, unpaid interest accrues and is added onto the principal, causing the loan balance to increase over time and eventually become larger than originally projected. Therefore, you must always make full payments possible, saving thousands over time!
In conclusion, knowing the factors contributing to an increased total loan balance is essential for effective financial management. At Advance Capital Now, we prioritize transparency and education, guiding you toward informed decisions and tailored solutions for your financial success.