These Factors Will Cause Your Total FAFSA Loan Balance to Increase
FAFSA is the go-to option for many higher education loans. Over time, however, balances can increase due to many factors including interest.
You'd expect loan balances to decline as you make repayments, though this isn't always the case. They may even be higher than the amount you originally borrowed. So, what increases your total student loan balance with FAFSA?
The cost of higher education is going up, prompting people to take on student loans. Nine out of 10 students use college loans, such as FAFSA (Free Application for Federal Student Aid), to cover the expenses of attending private, for-profit colleges. However, according to Moody’s, about half of student loan borrowers are even further in debt five years after they started paying back their loans. Here's why.
What is the top reason FAFSA loan balances increase?
One of the biggest culprits behind loan balances rising is interest, which starts to accrue on a loan from the day it's disbursed. Even if you receive a federal student loan, you'll be required to repay that loan with interest.
Unsubsidized federal loans usually accrue interest during the deferment period, which increases the loan balance. And in the case of student loans, the interest accrues even though you don’t make loan repayments while attending university. Interest also accrues during the forbearance period if you've been granted one.
What are some other reasons why my student loan balance went up?
Missing or deferring payments on loans will increase the balance, as will paying less than the scheduled monthly amount. Payments cover the interest and fees first before being applied to the principal. Therefore, by paying less, you're reducing the principal by less (or maybe not at all) while the interest grows.
What is interest capitalization?
Interest capitalization, by definition, adds the amount of unpaid interest to both the accrued interest and principal, leading to higher interest accrual and a larger loan balance. Unpaid interest may be capitalized in the following situations:
- Following periods of deferment on an unsubsidized loan or forbearance on any type of loan
- Following the grace period on an unsubsidized loan
- If you fail to annually update your income for some income-driven plans
- If you voluntarily leave a pay-as-you-earn (PAYE or REPAYE) or income-based repayment (IBR) plan
What are some easy ways can I reduce my FAFSA loan balance?
There are several methods that can be applied to reduce your FAFSA loan balance. We've outlined a few helpful tips down below.
1. Pay more than your repayment schedule specifies.
By doing this, you'll not only be tackling the interest, but your hard-earned money will also go toward paying down the principal. TikTok finance guru Taylor Price explained to Market Realist the importance of setting a budget when it comes to student loans. Not only should you have a reasonable budget in mind when you borrow but also when it comes time to pay the money back.
2. Pay the loans with higher interest rates first.
Higher interest rates means more money out of your pocket. If you want to pay your student loans down faster, you should consider wiping out those with higher interest rates first. If your loan has a variable interest rate, you could consider refinancing at a lower, fixed interest rate.
3. Find out if any of your student loans qualify for forgiveness.
Some student loans qualify for forgiveness which means you won't be required to pay some or all of the money back.
4. Pay the monthly interest due when loans are in deferment.
Even when your loans are in deferment, you should make every effort to at least pay the monthly interest accruing. If you're on a federal income-driven plan and your monthly payments are below the interest accrued, you can sign up for a REPAYE plan. This forgives 50 percent of the unpaid interest to be capitalized each month.