Interest rates are rising for federal and private student loans. For borrowers with variable interest rates, the recent rate hikes may cause havoc on their ability to repay their student debt.
From the day the student loan note is signed and disbursed, if the loan is unsubsidized, it begins to accrue interest. So depending on the length of time taken to complete coursework and any period that a loan is in forbearance or deferment, interest will accrue, growing the overall balance. For this reason, many borrowers who are approaching repayment may find their student loan balance is higher than the amount they borrowed originally.
Here are a few questions on accrued interest that we’ve addressed recently. Letters have been edited for clarity and to protect readers’ privacy.
Q: I have a $68,513 consolidated student loan that has reached $119,837. I am in a position to pay the loan back, but not all the ridiculous interest. Is it possible to have the interest and penalties removed, so I can begin paying only what I borrowed? If so, how? Who should I contact?
Unfortunately, there is no way to go back in time. Lenders are not willing to remove the accrued interest. The only way to tackle this growing debt is to develop a strategy where the monthly payment is more than the interest added each month. Any extra funds can be added to the payment to whittle down the principal balance.
Refinancing may be a good option if the borrower qualifies for a fixed, low-interest rate loan. But the Student Loan Ranger recommends talking to a nonprofit loan counselor beforehand to understand the best option for your specific student loans. There are some protections, such as via income-driven repayment plans and Public Service Loan Forgiveness, which are lost when refinancing a federal student loan into a private loan.
Q. My daughter paid $60,000 on her student loans, but the balance only went down by $10,000. Why?
Under income-driven federal repayment plans, borrowers sometimes only make payments that cover the interest on the loan. The Student Loan Ranger recommends borrowers to look at how much of the payment goes toward the principal as well as how much is being applied to the interest on the loans.
If your daughter has several loans, it’s likely that most of her payment each month is only being applied to the interest. That means little is being done to decrease the overall balance.
Sometimes a borrower’s choice in repayment plan may increase the life of the loan. Other factors, like a high interest rate, may also factor into a ballooning balance. If you have questions about how the payment is being applied, be sure to reach out to your loan servicer.
Borrowers can also see their list of loans owed and use a calculator to determine how much interest they will end up paying by using the U.S. Department of Education’s online repayment estimator.
Q. I currently have a $35,000 debt with Nelnet Inc. Although I am making timely payments of $150 to $200 monthly, my balance barely changes and even increases. I want to know what I can do to keep this from happening, whether it is combining loans into one set loan with a set APR or increasing payment amounts. The latter is tougher to do with other student loans that are with Navient Corp., along with credit card and car payments, etc. Any guidance would help.
The only way to make a bigger dent in the $35,000 balance is to pay more than the minimum payment each month. Payments will cover interest and fees first before being applied to the principal. Borrowers can make extra payments and tell their servicer how they would like the additional funds to be applied to make a bigger impact.
In order to see quick results in paying off student loans, borrowers must have a strategy. A few of these strategies might be considering a loan consolidation with a set annual percentage rate, known as APR, or paying more than the minimum payment each month.
The Student Loan Ranger advises borrowers to take inventory of all their student loans, know their respective interest rates and the balance owed on each loan when developing a repayment strategy.
If the loans have variable interest rates, it may be worth refinancing at a lower, fixed interest rate. Variable interest rates can cause fluctuations in minimum payments and may mean paying more in interest over the life of the loan. Be sure to discuss your student loan interest rates with your servicer or a nonprofit student loan counselor, so you know what to expect in terms of payments.
Once borrowers have a better understanding of the current state of their loans, it will hopefully lead to healthier financial habits and quicker repayment.