Many student loan borrowers owe more now than they did when they started paying — here’s why – Yahoo News | Vette Leader

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When you make monthly payments on a loan, you expect the balance you owe to go down. For many student loan borrowers, that’s not the case.

In 2021, nearly two in three student loan borrowers who made voluntary payments during the COVID-19 payment pause owed a larger balance than they originally did, according to a report by the National Consumer Law Center and the Center for Responsible Lending.

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But they are not alone. As states cut funding for higher education, tuition fees soar, falling on the shoulders of students and their families.

More and more students are now relying on loans to complete their higher education, and student loan balances can increase for a number of reasons. Here are some to watch out for.

Outstanding interest

When you take out a loan, you agree to pay it back with interest. But certain borrower options have some hidden consequences.

It is important to remember that interest always accrues over time. And if you have any unpaid interest left over, it will be capitalized or added back to the principal amount you borrowed.

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‘grace periods’

School deferral is a common option for student loan borrowers. But after closing, temporary payment pauses may increase the final amount to be paid.

If you’re temporarily unable to make your student loan payments, you can apply for a deferral — a short-term pause on your student loan payments. However, during this pause your loans may continue to earn interest.

During a forbearance, you can choose to pay the interest each month before it activates. This will keep your overall borrowing costs down. If you can, put a little money aside in a savings account each week to cover the interest accrued on your loan at the end of the month.

Many borrowers choose to stop making payments altogether during forbearance periods. This will increase the amount originally owed.

If you’re piling up some unexpected expenses, consider options that could reduce your monthly payment before requesting a full pause in your payments.

Longer repayment schedules

Some federal student loan repayment plans do not focus on prompt repayment of the principal amount owed.

With the extended repayment plan, you can repay your loans over a period of 25 years instead of the usual 10 years. If you opt for an advanced tiered plan, your monthly payments will start out lower and increase about every two years. This option can be helpful for recent graduates who are still in the process of applying for a job or have less disposable income but plan to make more money in the future.

However, at the beginning of the extended staged repayment plan, payments are made on the interest accrued on the loan — not the main loan itself. That means over time you’ll be paying more than you originally borrowed.

If you need a lower monthly payment, you can see if you qualify for an income-contingent repayment plan or an income-contingent repayment plan. While these plans still accrue interest over time, they are specifically formatted to depend on your income level and may even offer some interest rate benefits on subsidized loans.

After you’ve made payments on income-based repayment plans for 20-25 years, the rest of your student loan debt might even be forgiven. You will only be taxed on this balance on next year’s tax return.

Negative amortization

Negative amortization is a kind of last resort in loan repayment. This happens when you reduce your monthly payment to an amount less than the interest you’re being charged for that month, such as B. the minimum payment for a credit card. While it may feel like running up that hill and making monthly payments, that remaining interest is still activated in your starting balance. Therefore, the amount you owe is still increasing at the end of each month.

But that’s not all. This new higher balance you just accumulated comes with higher interest rates, which could also increase your monthly payment.

If you’re in a tight spot, talk to your student loan officer about options that could prevent your overall balance and monthly payments from increasing significantly.

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