What Increases Your Total Loan Balance? Avoid Costly Mistakes

How Deferment and Forbearance Impact Your Loan Balance

If you’re experiencing financial hardship, deferment or forbearance can offer temporary relief by pausing your monthly payments. While these options provide short-term flexibility, they can also lead to a growing loan balance.

Accrued Interest During Deferment or Forbearance

When you place your federal or private loan in deferment or forbearance, interest typically continues to accrue. For unsubsidized federal loans and most private loans, this means interest is added to the loan balance even though payments are paused. For example:

• Deferment may protect you from making payments temporarily, but interest accrues on unsubsidized loans and accrues for most private loans.
• Forbearance periods allow you to pause payments or reduce them, but interest continues to build on any unpaid balance.

This interest adds up quickly, increasing your total loan balance over time.

Capitalization of Interest

Once your deferment or forbearance period ends, any interest that accrued during this time is typically capitalized, or added to the principal balance. This means you’ll pay interest on a higher total amount, causing future payments to go toward interest first before reducing the principal.

Tip: To minimize this impact, try to make interest-only payments during deferment or forbearance if possible.

Common Misconceptions About Deferment and Forbearance

Many borrowers mistakenly believe that deferment or forbearance stops loan growth altogether. While these options prevent default, they do not freeze interest accumulation. Before opting for payment pauses, understand the long-term consequences.

Loan Forgiveness Programs That Can Help

Loan forgiveness programs can offer financial relief by canceling part or all of your remaining balance. These programs are particularly valuable for borrowers in specific careers or with qualifying repayment plans.

Types of Loan Forgiveness Programs

1. Public Service Loan Forgiveness (PSLF):

• • • Available to borrowers working full-time in government or non-profit jobs.
    • Requires 120 qualifying monthly payments under an income-driven repayment (IDR) plan.

2. Teacher Loan Forgiveness:

• • • Designed for teachers working in low-income schools for at least five years.
    • Provides up to $17,500 in forgiveness for highly qualified math, science, or special education teachers and $5,000 for other eligible teachers.

3. Income-Driven Repayment Forgiveness (IDR):

• • • After 20-25 years of qualifying payments under an IDR plan, the remaining balance is forgiven.
    • Applicable to borrowers with substantial debt relative to income.

Eligibility Requirements for Loan Forgiveness

To qualify, borrowers must meet strict criteria:

• Be enrolled in a qualified repayment plan (e.g., PSLF requires enrollment in an IDR plan).
• Maintain consistent employment in an eligible public service, teaching, or non-profit role.
• Ensure payment history aligns with program requirements.

Impact of Loan Forgiveness on Your Loan Balance

Loan forgiveness can provide significant financial relief by eliminating a portion or the entirety of your loan balance. However, be aware that forgiven loans under IDR plans may be considered taxable income, depending on current IRS regulations.

Pro Tip: Regularly check your progress and maintain detailed records of qualifying employment, payment history, and enrolled plans.

Strategies to Manage and Reduce Your Loan Balance

Borrowers can take proactive steps to reduce their loan balance by altering repayment habits. Strategies like making extra payments or starting repayment early have measurable results over time.

Benefits of Making Extra Payments

Extra payments provide borrowers with significant advantages:

• Reduce Principal Faster: Payments above the minimum requirement go directly toward reducing the principal, minimizing future interest.
• Save on Interest: Borrowers save hundreds or thousands of dollars by paying down the loan faster and decreasing interest accumulation.
• Shorten the Loan Term: Extra payments can help you become debt-free years ahead of schedule.

Tip: When making extra payments, specify that these go toward the principal to maximize their impact.

Advantages of Early Payments

Starting payments immediately after borrowing—even while still in school or during interest-only periods—is one of the most effective ways to manage loan balances. Early payments reduce the amount of interest accrued over the life of the loan, especially for long-term debts like student loans or mortgages.

Beware of Prepayment Penalties

While making extra or early payments is beneficial, some private loans may include prepayment penalties. These are fees charged for paying off loans before the term ends. To avoid penalties:

• Check your loan agreement for prepayment clauses.
• Consult your lender to confirm extra payments won’t trigger fees.

The Path to Financial Relief and Stability

Understanding what increases your total loan balance is the first step toward taking control of your debt. Whether navigating deferment, exploring forgiveness programs, or making strategic payments, every borrower has tools to minimize long-term costs and achieve financial stability.

Take action today by reviewing your loan documents, calculating the cost of deferment or forbearance, and exploring forgiveness opportunities. Even small steps, like making extra payments or contributing during a grace period, will yield significant benefits.

Want to simplify your loan management further? Start by calculating the long-term savings of interest-only or principal-driven payments. Your financial future is worth every small effort.

For more, check out our calculators: Tools and Calculators