6 Factors Cause Total Loan Balance Increases [2023 Updated]

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Updated: Apr 19, 2023
author photo Written by Patrick MooreUpdated: Apr 19, 2023
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It is alarming to check your total loan balance and realize the value has suddenly gone up.

You haven't done anything different or made major alterations to your loan lately so you’re wondering what could be the culprit.

Are there factors you’re not aware of that is causing your total loan balance to increase?

There are many factors that can lead to an increase and in this article, we’ll highlight 6 factors that can cause a total loan balance increase in 2023. Even if you think you’ve done nothing wrong, you’ll find a possible cause and solution to fix this problem here.

What is Interest?

Interest can be described as the payment given to a lender for providing a loan.

For example, if a lender borrows you $1000 with a 5% interest rate, the loan would have a $50 ($1000 * 5%) interest payment every year.

This payment is expected to be made along with the loan repayment. In the example above, you will repay a total of $1050 after a year. Interest is thus the extra cost paid by the borrower for receiving a loan from the lender.

What is Capitalization?

When the payment of interest on a loan is delayed, the lender may decide to add the unpaid interest to the principal loan balance.

When a lender does this, the loan is said to be capitalized. Capitalization of a loan increases the debt amount as it works in the same way as compound interest.

When a loan is capitalized, subsequent interest payments are calculated based on the new principal resulting from the capitalization.

What is Capitalized Interest on a Student Loan?

For student loans, capitalization is a common occurrence. A major cause is extended payments. When you spread the repayment of your student loan over a long period, the interest is usually not paid in time, which makes the interest to be capitalized, adding to the amount of the principal.

The capitalized interest is the interest calculated based on this new principal, and this is what increases your total loan balance.

6 Reasons Cause an Increase in Total Loan Balance

Reason 1: Missed or Delayed Payments

Lenders generally do not ask for immediate repayment when you borrow from them, although they expect you to pay on schedule. For example, lenders give students grace for a period of six months after their studies to repay their loans.

The grace period is for them to get a job and make money. When you default or delay repayment, it accrues extra interest. The extra interest is added to your loan principal, causing an increase in your total loan balance.

Reason 2: Extended Repayment

An extended repayment plan usually lasts for at least 20 years. This plan reduces your monthly repayment to a small and more convenient amount. Maybe you consider this a comfortable option, but you should know that it has some disadvantages. One major disadvantage is an increase in your total loan balance. 

Your monthly payment is smaller, so you keep repaying for a longer time, leading to increased interest. And consequently, you pay a cumbersome loan balance than the original amount you borrowed.

Reason 3: Income-Driven Payments

This situation is common with federal student loans. An income-driven payment plan allows borrowers to repay their loans based on their income and family size rather than with amounts that help clear the loan faster.

Although it may sound like an affordable option, this repayment structure can lead to negative amortization. This is a situation where your monthly payment is not enough to cover the interest accrued on the loan, such that the amount you owe keeps increasing with time.

Reason 4: Pay Less than the Requested Amount

There is usually a minimum amount you are expected to pay every month that covers both the principal payment and your loan interest such that your outstanding debt reduces over time.

This is a crucial fact to be aware of so that when you make repayments, you plan an amount that shields you from experiencing an exponential increase in your outstanding balance.

Reason 5: Forbearance and Deferments

This factor is similar to delayed or missed repayments. Many lenders sometimes give breaks or grace periods to their borrowers who are having a difficult time with consistent payments. For example, lenders give a six-month grace period to students after their studies before requesting their loan repayments.

However, you must know that when you defer or temporarily stop making payments, the capitalization still goes on, leading to an increment in the value of your total loan.

Reason 6: Errors in Calculation

You would agree with me that everyone is prone to making mistakes. A miscalculation from your lender can cause an increase in your total loan balance. Mistakes like wrong documentation of the amount you paid, mixing up your account with another person’s, and other algorithmic errors can occur. 

It is thus very important that you keep copies of your loan statement and other documents so you can make adequate complaints to your lender if you notice that your balance is unnecessarily increased.

13 Methods to Prevent Your Loan Balance From Increasing

Knowing that you have an outstanding debt to settle can make you feel less financially secure. It can also hinder you from planning other financial goals like building your emergency fund, saving for retirement, starting a business, buying a home, or even saving for a vacation.

There is a sense of relief to make more life plans when you know that your loan balance is at least reducing, if not completely settled. Here are things you could do to prevent your loan balance from increasing.

1. Avoid Delayed Payments

For example, if you took a student loan of $45,000, with an interest of 5% every year, at the end of a four-year course, the loan would have compounded annually to about $54,700.

This means that your loan balance would become significantly higher than when it was obtained in your first year.

Thus, it would be best if you endeavored to start paying off your student loan while you are in school and within the grace period; either by taking a side hustle, a paid internship, or by making small, consistent payments from your savings to offset any additional interest.

2. Pay More Than the Minimum Payment

You are not restricted to paying only the amount specified by your lender in your repayment schedule. You can always make extra payments. When you pay more than the monthly minimum, your principal amount and the interest to be paid are reduced, leading to a significant reduction in your loan balance.

You can go about this by paying off any administration fee relative to your account, the interest, and the principal amount. Even if you have satisfied your future payments, keep paying as much as you can every month. When you plan to spend a little extra on your monthly loan repayment, you save greatly in the long run.

3. Pay Back Your Most Expensive Loans First

This is an important action to take to avoid a skyrocketing loan balance. As expected, expensive loans attract higher interest rates; thus, you should prioritize repaying them. If you received loans from different lenders, you should allocate payments first to the higher interest-rate lender.

Failure to do this can lead to a greater accrued interest and an exponentially increased loan balance, which could make future payments difficult.

When you pay your most expensive loans first, you are able to keep your loans from going beyond the limit of what you can afford to pay. However, this does not imply that you should ignore your lower-rate loans.

4. Refinance Your Loan

Refinancing your loan involves revising the terms of your existing loan, such as the payment schedule, interest rate, etc., for a more favorable one. It also involves obtaining a new loan to pay off one or more existing debts or outstanding loans. When a new loan is obtained, its agreement is replaced with the updated terms.

You can also refinance your student loan by using one lender, merging multiple loans into a single payment, and possibly getting a lower interest payment.

When you want to refinance, reach out to multiple lenders and ask about their fees, rate, and other criteria that make you eligible to obtain a refinance loan. Refinancing your loans affords you the opportunity to get loans at a more affordable rate, thereby leading to a reduced loan balance.

5. Pay Loans with Tax Refunds

Paying off your loan with your tax refund is one of the most comfortable ways to settle your student loan before the interest increases outrageously. If you have one merged loan, you can speak with your lender and use your tax refund as a one-off payment of your principal. However, if you have more than one loan, you can either

- Use your refund for your high-interest loan so that you can save more.

- Use your refund to settle your loan with the lowest balance. This gives you a sense of accomplishment to focus on other loans.

- Divide and spread your refund through all your loans

6. Crosscheck Your Budget

Although cross-checking your budget doesn't directly reduce your total loan balance, it helps you save some money on your loan repayment.

If you earn some extra money, you can make a budget to spend less and save more. You can use the extra bucks you save to pay more with your monthly repayment, reducing your total loan balance and settling your debts quickly.

Take out some time to reevaluate your budget to remove dispensable items. Classify the items in it as either needs or wants. Spend money on important things and save the rest.

7. Choose Automatic Debit

Automatic debit involves giving your student loan provider access ahead of time to electronically withdraw money from your bank account at regular intervals. You can set up the automatic debit payment to either be the same amount every time or to be a varying amount.

Automatic debit makes it easier to stick to your goals to avoid an increased loan balance. You could also save some money because some loan providers give interest rate discounts for students signed up for auto-pay.

Automatic debit is a good option to consider; however, you must be careful with revealing your account details to just anybody. Before granting your loan servicer permission, confirm that they are legitimate and credible.

8. Find A Lower Interest Rate

The major reason for difficulty with repaying loans is not usually the principal amount but the interest capitalization. Different lenders have different interest rates, some high and some low. You should look around for loan providers that offer interest rates as low as 3% to make your loans more manageable. 

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9. Get A Temporary Interest Rate Reduction

A temporary interest rate reduction is an option that is only possible with private loan providers. When you apply for a federal student loan, you only have the option of extending your payment duration based on your income.

However, with private loans, you can negotiate with your lender to temporarily reduce your interest rate for a period of time when you think you can’t pay up the entire amount.

This is particularly possible if you are struggling with your monthly payment plan or if you intend to refinance. Whilst it is up to your lender to accept or decline your request, it is an option to consider.

10. Loan Forgiveness/ Repayment Alternatives

Loan forgiveness happens when you are released from the obligation to pay your loan either partially or fully. This opportunity is particularly available for people with public service employment, like government employees, teachers, members of the military, etc. Only federal student loan debtors can apply for loan forgiveness.

However, there are certain eligibility criteria that must be met before you can qualify. Ensure you meet the qualification before applying. You can also ask your loan service provider for other repayment alternatives available to settle your loan before it increases excessively.

11. Loan Avalanche

In this strategy, you first set a certain amount of money for your debt settlement aside. Afterward, you make a minimum repayment on all your outstanding loan accounts, and then you use the money left to settle the loan with the highest rate. 

Once you have settled the highest-interest debt fully, the extra funds are used for the next loan with the highest interest until all debts are settled. This method helps you minimize the interest you have to pay while working on settling all your debts, and it also helps you achieve your debt-free goal in time.

12. Try Out Snowballing

Snowballing is similar to the loan avalanche method because you also make a minimum payment across all your debts.

With snowballing, you first list all your debts from the smallest to the largest. Then you separate a certain amount of money each month to settle the smallest debt first while you make a minimum monthly payment on your other debts.

When you have paid off the smallest debt, you proceed to settle the next smallest until all the debts are paid in full. 

13. Become a REPAYE Plan Member

The Revised Pay As You Earn (REPAYE) plan is a federal Income-driven plan aimed to help student borrowers have an affordable monthly loan payment that corresponds with their income.

This implies that it can increase or decrease based on the borrower’s income changes. The REPAYE allows you to enjoy an interest payment benefit.

When you apply for a REPAYE during the first three years, if your payment does not cater for the monthly interest accrued to your loan, the government will remove the unpaid interest on the subsidized loans.

This helps the borrower’s loan balance from accumulating during the first three years of being on REPAYE.

Frequently Asked Questions:

1. How Does Student Loan Interest Work?

When you apply for a student loan, whether private or federal, the lender gives a document containing the terms and conditions which you are expected to comply with upon repayment.

A student loan comes with interest which you must repay along with the principal after graduating.

A federal student loan can either be subsidized or unsubsidized. For a subsidized student loan, the federal government is in charge of paying the accrued interest while you are still a student.

However, upon your graduation, you take on full responsibility for your student loan repayments. For an unsubsidized loan, the interest on the loan starts accumulating when you obtain the loan, and you are responsible for paying all.

2. What leads to an increase in your student loan balance?

Like every other type of loan, a student loan lender charges interest on the money borrowed. The interest accrues daily such that any unpaid interest becomes capitalized.

If you miss a loan payment, forbear your loan, defer your loan, or make monthly loan payments that aren’t enough to cover your interest, your loan balance will increase exponentially.

The total amount you owe increases when you do not make your monthly repayments as scheduled and the unpaid interest is added to the principal amount.

When this happens over time, the result is a significant increase in your total loan balance compared to the initial loan amount. You can avoid this by paying off your loan when due.

3. Simple Interest VS Compound Interest: What's the Difference?

The major difference between simple interest and compound interest is that the simple loan is calculated by using just the principal amount of the loan, while compound interest is obtained from the principal amount and any outstanding interest that has accrued.

For simple interest, the principal amount is fixed at the actual amount borrowed. It is the same every year. However, for a compound interest, because the interest compounds over time, the principal amount changes every year.

Typically, the total amount calculated with interest at the end of one year becomes the principal amount for the next.

4. What is the COVID-19 emergency relief for student loans?

As a result of the pandemic, finding student loan relief has become even more pressing. Thus, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) to give forbearance to borrowers from March 13, 2020, to December 31, 2022. 

The benefits of this emergency relief for student loan borrowers include:

  • A 0% interest rate drop
  • No accrued interest
  • Payments of loans are temporarily suspended
  • Any interest owed as of March 12, 2020, will not be added to the principal balance

While the interest rate has dropped to zero, and payments are temporarily suspended, you still have the option to make manual payments on your loans ahead to make progress on reducing your loan balance.

5. How is interest calculated and what is the interest rate factor?

The daily rate is first determined by dividing the annual interest rate by 365. Next, the daily interest rate is multiplied by the outstanding principal amount to determine the daily interest amount. Finally, the daily interest amount is multiplied by the number of days in the billing cycle to know the due amount. 

The interest rate is a percentage of the principal charged by and paid to the lender. The decimal equivalent of the interest rate is called the interest rate factor.

6. How to Avoid Paying Capitalized Interest

  • Make repayment early before capitalization applies

    One sure way to avert capitalized interest is by making your repayments early before the grace period expires and the lender begins to add to your balance.

  • Start loan repayment right from school

    You can prevent capitalized interest by paying off your loan as you study before it starts building. You can achieve this either by getting an extra job or by paying out of your savings.

  • Make extra repayments per time

    Making higher repayment than your standard repayment dues helps compensate for potential interest accumulation.

  • Avoid income-driven repayments

    An income-driven repayment plan allows you to make payments that are lower than your standard repayment amount. Paying less than your repayment plan can put you in debt longer than your repayment term, thereby leading to you paying a capitalized interest.

7. How to track student loan repayment progress?

Tracking your student loan repayment progress is pretty easy. For private loans, visit your loan servicer’s official website, while for a federal loan, visit studentaid.gov. When you log in to the page, you will find details such as your loan amount and balances, your current loan status, your interest rates, etc.

Monitoring this information and communicating with your loan provider would help you keep track of your progress.

8.  What kind of student loan repayment plans are available?

There are several amortized plans available to pay off your student loan. It is advisable to consolidate all your federal loans into one by using these repayment plans. An amortized plan helps to ensure that your student loan is fully paid at the end of the repayment period. They include:

  • Graduated repayment plans - If you consolidate, your debt is paid off between 10 - 30 years.

  • Income-based repayment plans - You pay off your loan using a certain percentage of your income.

  • Standard repayment plans - if you consolidate, your debt is paid off between 10- 30 years.

  • Income-sensitive repayment plan - This plan is available for only Federal Family Education Loans, and debt is paid off in 15 years.

9. What are the different types of interest?

Fixed Interest</ h3>

Fixed interest is a type of interest rate that doesn't change throughout the term of the loan. Where a loan has a fixed interest rate, the borrower is certain of the total interest amount, and it is guaranteed not to fluctuate at any point in the loan term.

However, fixed interest may sometimes apply only to a part (limited period) of the loan term. While the predictability of fixed interest is a notable benefit, loans with it usually have a high-interest rate.

Variable Interest</ h3>

Variable interest is also known as a 'floating interest rate'. It is a type of interest rate that fluctuates over the period slated for loan repayment. This fluctuation is influenced by a volatile benchmark interest rate/index. 

The two major benchmark rates for loans are the London Inter-Bank Offered Rate (LIBOR) and the federal funds rate. The catch with a variable interest rate is that the payable interest on the loan may decrease or increase depending on the benchmark index.

Simple Interest</ h3>

This interest is calculated based on only a percentage of the principal or original loan amount. All subsequent loan interest payments with simple interest are calculated on the principal only.

The formula for calculating simple interest is P×I×N. Here, P is the Principal, I is the Daily Interest Rate, and N is the number of days in the payment interval. The distinctive feature of simple interest is the unchanging amount of the principal.

Compound Interest</ h3>

As opposed to simple interest, compound interest is calculated on a compounded principal. This means that at every payment period, the previous interest is added to the former principal to obtain a new principal. The new principal obtained becomes the basis on which the new interest will be calculated.

As a result of this, compound interest increases progressively across the loan term. Most federal student loans operate on simple interest, although some private loans may use compound interest.

Annual Percentage Rate

Annual percentage rate is the format in which you express the interest rate that is calculated annually. This means that where the interest rate on a loan is calculated annually, the resulting rate is an annual percentage rate (APR).

For APR, the interest rate is expressed with a percentage of the principal. A peculiarity of the APR is that it doesn't only reflect the yearly interest rate but the accompanying loan fees.

Prime Rate

Prime rate is also known as the 'prime lending rate'. It refers to the interest rate at which banks generally offer loans to their most creditworthy customers. Being that the customers who are beneficiaries of prime rates mostly have good credit, the interest rate is usually low. 

Another relevance of the prime rate is that it serves as a reference for some variable interest rates. In this reference mode, they are referred to as a percentage above or below the prime rate.


This article has made you understand what increases your total loan balance, as well as smart tips like getting a lower interest rate that you can adopt to avoid outrageous loan amounts due to capitalization.

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author photo

Written by

Patrick Moore


Patrick Moore is an expert contributor and lead editor at CreditYelp, specializing in credit card news, personal finance advice, and entrepreneurship.

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