Why Student Loans Grow Over Time

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How Student Loans Grow So Quickly

Understanding the mechanics of loan growth is the first step to protecting yourself from ballooning debt.

Higher education is expensive — whether it’s a four-year university or a technical program. Many students borrow tens of thousands (sometimes even hundreds of thousands) of dollars. However, what surprises many borrowers is just how quickly student loans can accumulate, especially if payments are delayed or if you make mistakes in repaying these loans.

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💰The Basics of Loan Growth: Interest and Fees.

When you make a student loan payment, your payment is split between:

Interest

The cost of borrowing.

Principal

The actual loan balance.

Initially, most of your payment goes toward interest, rather than principal. That’s how amortization works.

📊 Example:

A $40,000 loan at 6% interest →

First monthly payment = about $287.

Interest = $200 →

Principal reduction = $87.

But if you can only pay $150, you fall short on interest.

The unpaid $50 interest gets added to your loan balance. Next month, you owe interest on that higher balance.

💡 That’s one way student loans can quickly snowball.

⏳ Deferred Payments Make Things Worse.

Deferment and forbearance may feel like a relief from the obligation to repay your student loan, but there’s a hidden cost: interest keeps building while you’re not making payments.

Over time, compounding interest (interest charged on top of unpaid interest) can add thousands of dollars to your balance. In some cases, borrowers start repayment owing nearly double the amount they originally borrowed.

The Perils of Interest Capitalization 🔄

Capitalization happens when unpaid interest is added to the loan’s principal balance. You then pay interest on top of interest.

📌 Example:

$40,000 loan is deferred.

During deferment, $8,000 in interest accrues.

New loan balance =

$48,000.

You now pay interest on $48,000 instead of $40,000 —

Making repayment longer and costlier.

💡 It’s the ultimate “gotcha” moment.

⏰The Importance of Timely Payments

To avoid the traps of capitalization and compounding:

Try to make at least small, consistent payments.

Learn how deferment and forbearance affect your balance before using them.

Even modest payments during tough times can save you thousands in the long run.

⚠️How Fees Add to Your Balance

On top of interest, late fees, and collection fees can push your balance higher:

Missed payments often trigger late fees.

Falling behind long-term can add steep collection costs.

🚨The Impact of Loan Defaults

Defaulting on federal student loans has serious consequences:

Collection fees (up to 30% of your balance) — mandated by law.

Wage garnishment and seized tax refunds.

Significant damage to your credit score, making future borrowing for a home or car much harder.

📈 Summary: Understand How Your Loan Balances Increase.

What starts as a manageable balance can quickly snowball into overwhelming debt if interest, capitalization, or fees are ignored. The good news? Staying informed — and making even small, regular payments — can slow or stop that growth.

💡 Knowledge is power: The more you understand how loans multiply, the better equipped you are to protect your financial future.

✅ FAQ

Frequently Asked Questions – Student loans Increasing in Size Despite Paying,

Q: Why does my student loan balance keep growing?

💰 Interest costs on loans accrue daily. When someone doesn't pay the interest on their loan, the interest is capitalized, meaning it is added to the loan balance. Fees and penalties also contribute to increasing the loan balances. Missing even one student loan payment can have a ripple effect.

Q: What is "interest capitalization"?

📈 Interest Capitalization occurs when payments are not large enough to cover the unpaid interest cost. The unpaid interest gets added to the principal or loan balance. Because unpaid interest is added to the loan, of course, the balance you owe increases. And when the loan balance increases, the amount of interest on the loan also increases.

Q: Can I stop my balance from growing so quickly?

✅ Yes. If you can make payments during deferment/forbearance, or enroll in an income-driven repayment plan, this effort will slow or stop capitalization.

Q: Do private loans also grow this way?

🔒 Yes, but loan terms vary from the government-backed student loans. Private lenders may also capitalize interest more aggressively than federal student loan programs.

Quick Facts: Why Student Loans Grow So Fast

💸 Interest never sleeps – unpaid interest is always added to your loan balance (capitalization).
🕒 Payment delays – although deferment or forbearance may pause payments, interest charges continue to accrue.
📈 Changing repayment plans – switching plans can stretch the timeline and increase total costs.
👩‍🎓 Multiple loans, multiple rates – when you try to juggle several loans, each with different terms, tracking and managing your payments is harder.

Smart Tips

Always know your loan type (federal or private).

Check your interest rates and how they’re applied.

Review your loan statement every few months to catch capitalization.

Need Relief?

Even if your balance feels like it’s out of control, you have options:

Lower your payments through income-driven repayment plans.

Enroll in settlement or forgiveness programs.

Explore strategies to stop runaway growth.

About Attorney Dorothy.

With decades of experience in bankruptcy and debt relief, Dorothy helps clients determine whether bankruptcy is the right move — or if alternatives can achieve similar results more quickly.

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