Taking out a student loan can be a life-changing decision—often for better, and sometimes for worse. That’s why, no matter what type of loan you’re considering, it’s essential to know what you’re signing up for before you take it. In other words, you need to know exactly how much money you’ll owe so you can determine how and when you’ll pay it off. The first step is to understand your total loan balance—which is different from the initial debt you take on.
So, what is the total loan balance, exactly? The term refers to the principal you owe, plus any interest that accrues, explains Ian Group, a lawyer and money coach who paid off $230k of his own student loan debt. “The principal is the amount you borrowed for school tuition and expenses, but that money isn’t free,” he says. “Interest starts to accrue, which increases the size of the total balance.”
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In this article, we’ll cover total loan balance and the external factors, including interest, that can increase your student loan debt.
What increases your total loan balance? Factors to keep in mind
The primary factors that increase your total loan balance are loan interest, recapitalized interest, fees, and variable interest rates.
1. Loan interest
When you’re given a federal or private student loan offer, you’ll always be presented with a principal and interest rate. For instance, the government may offer you a $40,000 loan with a 5.50% interest rate. This interest rate determines your loan interest. When you’re looking at what increases your total student loan balance, this is one of the most important concepts to grasp.
“When you borrow money from someone else, they charge you interest as a way to offset the risk of giving you that money,” Group explains. “The higher the interest rate, typically, the higher the risk.”
This is normal for student loans, Group adds, and it’s something you need to fully understand before you take on your loan. If you take the example—a $40k loan with 5.50% interest—and consider that most loan providers give borrowers 10 years to pay it, you’ll be making a minimum payment of $434.11 every month.
Even as you pay, though, interest will accrue, and by the time you’ve made all 120 payments, you will have paid $52,092.61 total, which is $12,092.61 in interest. That also assumes you make every payment on time and in full, which is difficult for many people.
That said, if you’re able to pay more than the minimum amount—even $50 or $100 a month—you’ll save yourself thousands of dollars in interest in the long run.
2. Recapitalized interest
Despite planning and understanding the terms of your loan, you might find that you aren’t able to pay back your student loan on schedule. (Financial situations can change overnight, after all.) In that case, you can request a temporary pause, called a forbearance. This means you won’t have to make any payments during the pause—but interest will still accrue on the total loan balance.
“When the forbearance is over, the interest that has accrued will get added onto the principal balance of your debt,” Group says. “That temporary relief now turns into a long-term obstacle, because you’re now paying interest on both your principal balance and the additional interest you weren’t paying during the forbearance period.”
Group’s bottom-line advice on forbearance: “I would only recommend this option in the case of a serious emergency.”
3. Origination fees
“Many student loans have origination fees,” Group says. According to the Federal Student Aid website, this is a percentage fee charged by your lender for the processing of your loan.
“So in addition to all the interest you’re paying on your debt, you likely paid a 1-4% fee off the top of your loans,” Group says. “This means if you borrowed $20,000, your school only received $19,200. You still owe money on the full $20k, but $800 of that loan was paid to the federal government as a fee before the loan was disbursed.”
While these origination fees are conventional in areas where people borrow money, it’s still money coming out of your pocket, Group emphasizes. And though $800 is less than thousands of dollars in interest, it’s one more thing contributing to your total loan balance.
4. Variable interest rates
One advantage that federal loans (from the government) have over private loans (from a bank, credit union, or state-affiliated organization) is a guaranteed fixed interest rate. If you are given a 5.50% interest rate when you accept a federal loan, that interest rate will stay the same.
Private student loans, though, can have variable interest rates, Group says, meaning the amount of interest that accrues on your debt can go up or down, depending on the Federal Reserve interest rate. (According to MarketWatch, the Fed increased interest rates 11 times from 2022 to 2023, bringing them to the current 5.33% as of April 2024, the highest rate in over 20 years.)
“I personally like to go to sleep at night without the possibility of having to pay more tomorrow than I did today,” Group says. “But if you opt for a variable interest rate, just know you could wind up paying back more than you anticipated.”
Assessing the impact & reducing loan costs
You came here wondering what increases your total loan balance for student loans. Now you know that student loan debt has multiple factors that contribute to its growth overtime—and while interest is the most discussed, they all add fuel to the fire.
“All of these factors have a similar financial impact and add to your total loan balance,” Group says. “That’s why you need to understand what debt is and how it works before you assume any.”
Group emphasizes that the worst way to increase your total loan balance is to simply not pay your loans. “Interest will continue to accrue each month and, depending on the terms of your loan, you might also be subject to late fees,” he says. “It’s incredibly important to pay back any debt you owe and adhere to the specific terms of the loan, including the payment due dates.”
In terms of where to start, Group suggests repaying early and have a regimented payback plan in place.
“Many people don’t realize that student loan interest starts accruing the day the loan is disbursed to your school,” he says. “The smartest borrowers will do their best to start repaying their loans back as soon as possible. If that’s not possible, I’d say be diligent with your repayment plan and automate all payments to ensure you stay on track.”
The bottom line
More than half of college students have education debt by the time they graduate—with some research estimating that figure is closer to 70%. As someone who paid off a significant graduate school loan himself, Group urges students to understand the risk, learn about your options, and stick to your plan.
“Learning about student loans, the factors that increase debt, and repayment plan options will give you a leg up on your journey to becoming debt-free,” Group says.
If you currently have a student loan or will need to in the future, make sure you know your interest rate (ideally, you want a fixed one) and work out a savings and repayment plan. To do so, you can use the government’s Student Aid Simulator, or make a copy of this Student Loan Spreadsheet that will work out the numbers for you.
Above all, you want to approach your student loan experience armed with knowledge and preparation. And remember that, as Group puts it, “what you borrow is far less than what you will actually owe, and you are 100% responsible for paying it all back.”