Why Aren’t I Making Progress in Paying Off My Student Loans?

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By Mark Kantrowitz

June 22, 2020

Borrowers often get upset because they don’t seem to be making much progress in repaying their student loans, despite having been in repayment for years. There are several reasons why this phenomenon occurs. 

For example, during a recent webinar about student loans, a participant asked:

I have 3 loans for a total of $15,000. I’ve paid about $10,000 toward my loans. The company says I still have a balance of $12,000. Is there a recommended way to approach the student loan company to resolve?

The answers to this question are a little complicated.

Using the Wrong Starting Balance

Part of the problem may be due to comparing the current loan balance with the wrong starting balance. 

Sometimes, borrowers compare the current loan balance with the original amount borrowed, as opposed to the debt at graduation. The debt at graduation can be much higher due to the addition of loan fees and capitalized interest to the loan balance. The progress against the higher starting point may be much greater. 

Interest Slows Repayment Progress

Loan payments are applied not just to the principal balance of the loans, but also to the interest that accrues on the loan. The amount paid over the life of the loan will exceed the amount borrowed.

For example, suppose you borrowed $25,000 at 5% interest with a 20-year repayment term. The monthly loan payment will be $164.99 and the total payments will be $39,597.16.

After 8 years, you will have paid a total of $15,839.04 and the remaining loan balance will be $17,838.63. Of the total payments at that point in the repayment term, $8,677.67 would have been applied to interest and $7,161.337 to principal. 

The scenario described in the webinar participant’s question could occur with a 7.5% interest rate and 20-year repayment term after 7 years into repayment. It can also occur with different combinations of interest rates and repayment terms. 

Impact of Deferments and Forbearances

Forbearances, deferments and other periods of non-payment will slow progress in repaying the debt. 

Interest continues to accrue during deferments, forbearances and other periods of non-payment. If the interest is not paid as it accrues, it will be added to the loan balance, increasing the amount of debt. This can increase the amount of time until the debt is paid off.

Even if the interest is paid as it accrues, deferments and forbearances are a time out on the repayment schedule, delaying the rest of the repayment schedule.

Use our Cost of Deferment Calculator to evaluates the impact of interest capitalization at the end of a deferment or forbearance on the monthly loan payment and the cost of the loan, assuming that the loan payments are re-amortized after the deferment or forbearance.

Longer Loan Repayment Terms Yield Slower Progress in Repaying Debt

Generally, loan payments are applied first to collection charges and late fees, second to interest and third to the principal balance. 

A longer repayment term yields lower monthly loan payments. A lower monthly loan payment means less money will be applied to paying down the principal loan balance. So, the debt will be sustained at a higher level than if the borrower had paid more each month. 

Thus, the longer the repayment term, the slower the progress in paying down the principal balance of the loan. 

A similar situation occurs with mortgages. In any kind of level loan amortization, more of the early payments go to the interest, as opposed to the loan principal. As progress is made paying down the loan balance, more of the loan payments will be applied to the loan principal. Progress in paying down the debt will get faster and faster, especially toward the end of the loan term.

Review the Payment History

The borrower should ask the loan servicer for a copy of their payment history. This will show the payments made by the borrower, the interest that accrued and how the loan balance changed. 

Our loan prepayment calculator can show you the payment schedule. Just set the prepayment amount to zero. This will show you what your remaining loan balance should be, based on the terms of your loans.

Most of the time, the remaining loan balance is correct. But, there have been a few cases where the lender made an error. In one case, the lender implemented loan amortization incorrectly, swapping the number of months into repayment with the number of months remaining. This error affected more than 1 million borrowers.

In another case, the lender incorrectly capitalized the interest that accrued during a specific type of forbearance. So, it can be worthwhile to double-check the lender’s math. 

A good place to start:

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