What Increases Your Total Loan Balance?

What Increases Your Total Loan Balance?

Jesse Knox
Jun. 1, 2023 | 15 Min Read
Updated Jul. 19, 2023

We all expect that when you make repayments to your lender(s), it is expected for those loan balances to decrease gradually over time. Yes, most of the time this is true but not always.  That said, this is not always the case and there are several factors that go into this. Believe it or not, loan balance amounts can also increase, despite your best efforts to pay back the borrowed money.

In this article, we delve into the factors that contribute to the growth of your overall loan balance, explore the concept of interest capitalization, and propose some important preventive measures that you do not want to miss.  I mean, come on, who desires to spend their entire lifetime repaying student loans or any other form of debt, right?  Let's find some effective ways to break free from this backward cycle.

How Do Loan Balances Go Up?

Lenders, driven by the desire to ensure timely repayment, meticulously structure your payment plan to gradually diminish the size of your outstanding principal over time.  This is a legit, prudent approach and is intended to alleviate your balance and give you a sense of progress towards your balance.  Sadly this isn't always the case because of a simple concept called capitalized interest. Capitalized interest can significantly slow down the repayment of your loan balance, causing initial progress to appear modest, even when you make payments diligently.

As the overall value of the loan gradually declines with payments the balance proportionally follows suit.  Over time, interest applied to each payment goes down which is how your overall balance gets paid off.

Now looking into interest capitalization, we encounter a process where the accumulated, unpaid interest stealthily merges with the principal amount, slyly augmenting both the principal itself and the future interest obligations.  This intricate interplay between principal and interest casts a formidable challenge, as it can propel loan balances to unexpected heights, often eclipsing your initial expectations.

Naturally, the pace at which you can extinguish your debt is contingent upon the designated term of the loan.  Federal student loans, acting as a common example, usually adhere to a standard repayment period of ten years.  Conversely, private loans venture into a wider spectrum, offering repayment terms ranging from five to fifteen years, depending on various factors such as the type of loan and the borrower's financial circumstances…etc., etc.

Yet, in the labyrinthine maze of loan repayment (and that is exactly what it is), unforeseen factors often lurk, poised to disrupt your envisioned progress.  Amidst the complexities of financial obligations, a myriad of unsuspecting elements can conspire to hinder your journey to debt freedom.  These elements, which might not ordinarily claim attention, possess the uncanny ability to subtly elevate your total loan balance, imposing additional challenges on your extremely reasonable goal for financial independence and freedom from the debt you are working so hard to pay down.

So let’s look at some reasons your loan balance may go up.

Calculation Mistakes

Miscalculations in calculations or the capitalization of loans can lead to unexpected increases in balances.  Even if you have diligently made all the right payments, it is absolutely crucial that you stay vigilant and question any sudden spikes in your balance—call the customer service department and ask them, and do not be afraid to request that they be specific.

There are various factors that can contribute to such issues, such as incorrect payment amounts, algorithmic glitches on the lender’s end, or mistaken account mix-ups with other individuals.  It is of the utmost importance to be aware of these possibilities and take action if you detect any discrepancies…or even the potential of this.


When the amount you repay towards your loan falls short of the payment amount that the lender requires, it can lead to an unexpected increase in the loan’s overall balance, even if you have been consistently paying money toward it.  Crazy, right?

The phenomenon of interest capitalization plays a significant role in shaping the trajectory of a loan.  It has the potential to result in exponential growth of the outstanding balance owed over time and is the stuff of nightmares for all of us.

To illustrate what I am talking about, let's consider a great scenario I found online.  In this situation, you have a $40,000 student loan with an interest rate of 5%, spanning a 20-year term.  At the end of the first year, if you manage to repay $1,000, you would effectively reduce the principal amount to $39,000, right?  Wrong.

That’s right, keep in mind that during this same period, your lender would accumulate $2,000 in interest charges, thereby increasing the total loan balance to $41,000 after the $1,000 repayment.  Are you getting this?  You pay $1,000 toward $40,000 in the first year and end up owing $41,000!

In order to make meaningful progress in reducing your debt, it becomes 100% imperative to make monthly loan payments that not only cover the principal amount but also account for the capitalized interest on your student loan.

Considering the aforementioned example, this would require an annual payment exceeding $3,000 to effectively address both principal reduction and the accrued interest.  It is essential to be aware of the impact of interest capitalization and proactively manage your loan repayments to ensure a healthier financial standing.  Strike the phrase
“minimum payment” from your vocabulary immediately.  And learn how this math works; it could save you thousands of dollars—maybe even tens of thousands.

Deferring/Missing Payments

Opting for forbearance or deferring your loan payments can have a capitalizing effect on a loan, as well, just as paying too little toward the balance, as we just discussed.  This will, of course, result in the loan balance increasing over time.

Now, when it comes to college loans, lenders will usually allow students to have a six-month grace period after completing their studies before initiating loan repayments.  (This may even be a law in some states, but do not quote me on that.)  Regardless, this grace period allows you to secure employment, start generating some income, and manage some initial expenses more comfortably before you have to start paying back that anchor of a loan.

It is important to keep in mind that even during this “grace” period, interest on the loan keeps accumulating.  This means that the loan's balance continues to grow, grow, grow!  …potentially leading to a higher repayment obligation once the grace period ends.

Look, educating yourself on all this stuff is half the battle.  Paying more money than you want to is just far worse when it is unexpected, I think we can all agree.

Payment Delays

Similarly to deferring and/or missing payments, payment delays can have a profound impact on your loan.

Upon obtaining a loan (of any kind), it is fairly customary not to commence immediate repayment of said loan, and the timing of repayment initiation varies depending on the loan's purpose.  But suffice it to say that there is some varying gap between getting the loan and starting your payments toward it, be it one month or several.

A prime illustration of this is observed in the case of students, who typically do not commence loan repayments while they are pursuing their college education.  Consequently, the phenomenon of interest capitalization comes into play, causing their loans to expand in size throughout their academic journey, which we have already covered.

To provide a concrete example, let’s go back to the same example we used before.  A $40,000 loan with an annual interest rate of 5% that extends over a four-year term, with interest compounded on an annual basis.  In this specific example, the loan balance would escalate to approximately $48,620 by the time the student’s final exams roll around.

Thus, as you approach the culmination of your academic tenure, it is highly probable that your loan balance will have significantly surpassed its initial value during your freshman year.

Remember that just because you are given that delayed time frame before you have to start paying back the money you owe, this is not a “free” pass to not start paying it back.  Although, especially if you are a student, this may be difficult to impossible, the price you pay, both figuratively and literally, could be quite a bit of money when that interest is the clock that keeps on ticking, regardless.  Just keep that responsibility in mind.

Income-Based Payments

Within federal income-based repayment programs, borrowers are tasked with repaying an amount commensurate with their monthly earnings, rather than an outright sum that would entirely extinguish their student debt.

So, what does that mean?  It means that the lender has likely paid some MBA an ungodly amount of money to develop an algorithm that says what a person with perhaps a lower-than-avg. annual income can afford to pay each month without defaulting on their loan.  Although I say this snarkily, this is something that many find to be quite a double-edged sword: some loving it and others hating it, for what are probably obvious reasons.

Consequently, it is not uncommon for the repayment amounts to occasionally fall below the level required to offset the accrued interest charges.  As a result, and here is that not-so-great edge of the proverbial sword, the loan balances have a tendency to incrementally rise over an extended duration.  But maybe it keeps you from defaulting.  Regardless, this is how taking an income-based payment plan on a loan can cause the balance to increase, rather than go down, over time.

Extended-Duration Payments

Extended-duration payment plans are simply loans that typically last for 20 years or more before being paid off in their entirety.  These typically reduce the size of the loan over time, but the process happens at a snail’s pace—much, much more slowly.

When you pay over a longer period of time, you wind up owing the lenders considerably more from the accrued interest.  In return, the monthly payments are smaller, giving you more disposable income today.  (This accomplishes the same goal, but via a different path, as the income-based payment plans we discussed in the above section.)

Again, if you miss payments on an extended style of plan, your total loan balance may rise and rise in a potentially significant fashion.  That is because for the first few years, payments usually only cover interest plus a tiny bit extra.  Missing a single payment per year can land you right back where you started, believe it or not.

If you elect for this type of repayment program, it is financially healthy to be aware of exactly what you are getting yourself into.  There are some good and bad, some pros and cons.  Choose wisely based on your individual needs.

Capitalized Interest Is Not Your Friend

What occurs when interest is capitalized on your loan?  We have alluded to it above, but let’s dive in a little more here.

In essence, capitalized interest entails having to repay a larger sum, potentially reaching a point where it becomes financially unsustainable.  And let’s not forget the stress that may come alongside it, as well.

To avoid the accrual of capitalized interest on your loan, here are some things you can try…

Strive to pay off the interest before the lender incorporates it into your balance.  This necessitates making higher monthly payments during the grace period, allowing you to mitigate the impact of additional interest.

Next, if feasible, consider initiating loan repayment while you are still in school.  By starting to pay off your loan earlier, you can prevent interest from accumulating as you pursue your degree.  This can be achieved through utilizing savings or even taking on a part-time job while juggling your academic commitments.

Lastly, some have found a great deal of help by making two half-payments every two weeks.  You may be thinking that this is no different than paying one full payment per month.  However, by making two half-payments per two weeks, this ends up being one full payment extra per year.  And when you look at that, over the course of that full year, the difference in principal paydown and interest saved, it is for-real jaw-dropping.

Understanding the factors that contribute to an increase in your overall loan balance at an early stage can potentially save you substantial sums of money over the loan's lifespan.  By proactively managing your loan repayments and taking preventive measures, you can significantly impact your financial outlook and alleviate the burden of interest accumulation.  It may be cliche, but knowledge is power.  Knowing this stuff can actually manipulate your bottom line to the good, should you choose to employ some of these tactics.

How Do Loan Balances Go Down?

Time to discuss the counter to the above.  We now know many of the ways your loan balance can increase, unbeknownst to the average borrower.  So we have armed ourselves with some knowledge to fight against that happening.  Great.

Now, let’s get into some information regarding the positive side of things.  How do we get these loan balances to drop faster than they typically tend to drop?

Below, we have outlined a few tips and tricks, some of which you prob. already know.  Others you may not, though!  Let’s get into it.

Get a Lower Interest Rate

The challenges of loan repayment often stem not from the principal amount, itself, but from the repercussions of interest capitalization, which can lead to financial hardships, as we have discussed above.

Lending institutions typically impose interest rates ranging from 5% and up per annum on student loans, creating significant obstacles when it comes to repayment, especially during the initial stages of starting your “real-life career” post-college…when income levels tend to be relatively modest.  This can pose a substantial burden for borrowers.

However, exploring different avenues and actively seeking out lenders offering lower interest rates can make a tremendous difference, actually.  It is not uncommon to find lenders providing interest rates below 3% that are specifically tailored for domestic students, significantly easing the strain of loan repayment and rendering it more manageable for you, as you get started adulting, haha.

To illustrate the impact of lower interest rates, let's revisit the $40,000 example we have been using.  Suppose you have a loan of $40,000 with an interest rate of 3%.  In such a scenario, making an annual repayment of “only” $1,200 would be adequate to maintain a steady balance.  Any amount exceeding this threshold would not only reduce the principal but also have a profound effect on reducing future repayment obligations (you would be awestruck to look at the entire amortization table for each).  By taking advantage of some of these favorable interest rates, you can strategically diminish your overall debt and create a more feasible path toward the successful repayment of your loan in full.

Make Extra Payments

Deviating from the prescribed repayment schedule outlined by the lender is entirely within your purview, granting you the freedom to embrace the option of making extra payments.  The expeditious repayment of the principal amount should be your ultimate goal, as it holds the key to a less-debt-ridden financial future.

When you decide to make additional payments, a specific allocation process comes into play.  Initially, any nominal administrative fees related to the management of your account are settled, a mere blip on the financial radar.  Subsequently, the surplus funds diligently work their way towards extinguishing the accrued interest, gradually chipping away at this portion of the loan.  Finally, the focus shifts to reducing the principal balance, inching ever closer to liberating yourself from the clutches of debt.

Remarkably, even modest enhancements to your monthly loan repayments can produce astounding long-term savings.  (Like that idea of paying a half-payment every two weeks vs. one full payment per month.)  Embracing the opportunity to proactively make extra payments empowers you to seize control of your financial trajectory, taking significant strides towards diminishing your overall debt burden.  Such prudent measures may potentially curtail the total interest paid over the duration of the loan, securing a more favorable financial outcome for you in the long run.

Pay Down the Smallest Loan Balance First

This may deviate from traditional thinking, however, if you feel that the most challenging part of paying back your loans revolves around your mental or emotional state, start with the loan with the smallest balance!

Getting a loan fully paid off can give you that “wind beneath your wings,” so to speak.  It gives you a win, is what it does.  And that can get your jump-started to pay off the next one.  Call it a debt snowball, per Mr. Dave Ramsey.

Sure, conventional wisdom may say to pay off the highest interest first, and if the emotional side of things is not impacting you, whatsoever, then going that route is awesome.  And you should do it.  But if not, the feeling you get from having a paid-off loan is really empowering and can have a real cascading impact on the rest of your debt.

So just keep that in mind and make the best decision on which method you would like to employ by doing an objective self-analysis of yourself.

Final Thoughts

I think the theme of this article is a little more abstract than the detailed stuff we went through.  Be intentional with your loans.  Understand how lenders benefit from the system.  And use that same system (legally) to employ smart tactics to save on interest and pay off your debt faster.  You can do it!

Jesse Knox
Jesse Knox

Jesse is a seasoned wealth hacker who has deep knowledge of personal finance, getting out of debt, and reviewing financial services products.