When you apply for financial aid through the Free Application for Federal Student Aid also known with short form FAFSA, you may be offered student loans to help pay for college. While these loans can make higher education more accessible, it’s important to understand how they work and what can cause your total loan balance to increase. Many students are surprised to see their loan balance grow over time, even if they haven’t borrowed more money. This can happen because of various factors, such as interest rates, repayment plans, and other charges.
In this blog, we will explore what increases your total loan balance FAFSA, so you can be better prepared to manage your student loans effectively.
Understanding Interest on Student Loans
One of the most significant factors that can increase your overall loan balance is the interest that accrues on your loans. Interest is the cost of borrowing money, and it accumulates over time. When you take out a student loan, you agree to repay not only the amount you borrowed (the principal) but also the interest that accrues on that amount.
There are usually two main types of student loans: first one is subsidized and other one is unsubsidized. For subsidized loans, the government covers the interest while you’re in your school at least half-time, during the grace time, and during deferment times. This means your loan balance won’t increase due to interest during these times. However, with unsubsidized loans, interest starts accruing as soon as the loan is disbursed. If you don’t pay the interest while you’re in school, it will capitalize, meaning it gets added to the principal balance, which increases the total amount you owe.
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What Increases Your Total Loan Balance Fafsa
Capitalization of Interest
Capitalization is another key factor that can increase your loan balance. As mentioned earlier, when interest is capitalized, it is added to the principal amount of your loan. This usually happens at specific times, such as when you enter repayment after a grace period or deferment, or if you fail to make interest payments on an unsubsidized loan while in school.
When interest is capitalized, you start paying interest on a higher principal balance. For example, if you have a loan of $10,000 and $500 in unpaid interest is capitalized, your new loan balance becomes $10,500. Now, the interest will accrue on $10,500 instead of $10,000, which means your loan balance will grow faster.
Capitalization can significantly increase the total amount you repay over the life of the loan, making it important to understand when and how this process occurs. If possible, paying off interest before it capitalizes can help prevent your loan balance from growing.
Deferment and Forbearance
Deferment and forbearance are options that let you temporarily pause making payments on your student loans, usually due to financial hardship. While these options can provide short-term relief, they can also lead to an increase in your loan balance.
During deferment, interest generally does not accrue on subsidized loans, but it does on unsubsidized loans. If you don’t pay the interest during the deferment period, it may be capitalized when the deferment ends, increasing your loan balance.
Forbearance, on the other hand, allows you to pause or reduce your payments for a period of time, but interest continues to accrue on all types of loans, including subsidized ones. This accrued interest is usually capitalized at the end of the forbearance period, leading to a higher loan balance.
While deferment and forbearance can be helpful in managing your finances during difficult times, it’s important to be aware of how they can impact your total loan balance.
Loan Fees
Loan fees are another factor that can increase your total loan balance. When you take out a federal student loan, you may be charged a loan fee, which is a percentage of the loan amount. This fee is deducted from the loan disbursement, meaning you receive less money than you borrowed, but you are still responsible for repaying the full amount.
For example, if you borrow $5,000 and the loan fee is 1%, you would receive $4,950 after the fee is deducted. However, you still owe the full $5,000, which increases your loan balance.
These fees might look small, but they can add up over time, especially if you take out several loans during your time in college. Understanding loan fees and how they affect your loan balance is important for managing your student loans effectively.
Extended Repayment Plans
When you start to pay back your student loans, you have several options for how to repay them. Some repayment plans, such as extended or graduated repayment plans, allow you to lessen your monthly payments by extending the repayment period. While these plans can make your payments more manageable, they can also lead to an increase in your total loan balance.
With extended repayment plans, you pay off your loan over a longer period, typically 25 years instead of the standard 10 years. While your monthly payments are lower, you end up paying more in interest over the life of the loan, which increases your total loan balance.
Graduated repayment plans start with lower payments that gradually increase over time. While this can be helpful in the early years of your career when your income might be lower, it also means you’ll pay more in interest over the life of the loan, increasing your total balance.
It’s important to carefully consider your repayment options and understand how they will impact your overall loan balance before choosing a repayment plan.
Missed or Late Payments
Missing or making late payments on your student loans can also increase your total loan balance. When you miss a payment, your loan may go into delinquency, and interest continues to accrue on the unpaid balance.
In some cases, late fees may also be added to your loan balance, further increasing the amount you owe.
If your loan remains delinquent for an extended period, it could enter default, which can have serious consequences, including an increase in your loan balance due to additional fees and penalties.
To avoid increasing your loan balance through missed or late payments, it’s important to make your payments on time or contact your loan servicer to discuss alternative payment options if you’re having trouble making payments.
Borrowing More Money
Lastly, borrowing more money than you need can increase your total loan balance. It’s tempting to accept the full loan amount offered to you through FAFSA, but it’s important to remember that you’ll have to pay back every dollar you borrow, plus interest.
Before accepting a loan, carefully consider how much money you actually need for your education-related expenses. Borrowing only what you need can help keep your loan balance manageable and reduce the amount of interest you’ll pay over the life of the loan.
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Conclusion
Understanding what increases your total loan balance on FAFSA is essential for managing your student loans effectively. Interest accrual, capitalization, deferment, forbearance, loan fees, extended repayment plans, missed payments, and borrowing more than necessary are all factors that can cause your loan balance to grow over time.
By being aware of these factors and taking steps to manage your loans responsibly, you can minimize the increase in your loan balance and ensure that your student loans remain manageable. Remember to stay informed, make timely payments, and borrow only what you need to achieve your educational goals without accumulating unnecessary debt.