Has your student loan payment suddenly increased and you have no idea why? There are several reasons why the “amount due” portion of your bill might look a bit different than the previous month.
Here’s what you need to know before you call your lender to discuss repayment options.
Interest rate calculations can change
The amount of interest you pay on your student loan is compounded daily, which can increase your monthly payment.
For instance, if you are making a payment during a month with 31 days versus 28 days, you will notice a higher monthly payment because there are more days in the month. More days equal more interest.
Also, if your loan has a variable interest rate (which can change at any time) instead of a fixed rate, you will notice a difference in your monthly payments if the Prime Lending rate or the LIBOR rate increases.
The Prime Lending rate is an interest rate at which banks lend to favored customers. The LIBOR rate is a benchmark rate that some of the world’s leading banks charge each other for short-term loans.
Your payments may not be going where you think
If you feel like you’re not making any progress on your overall loan amount, there may be two factors at play:
- The order in which your lender applies your payment, and
- The distribution of your payment if you have multiple loans.
When you make a payment each month, your lender applies those funds in a specific order: first to cover any late fees you may owe, then to the interest, and finally, to your principal, i.e., the amount you borrowed.
If you have more than one loan, there’s a good chance they each have different interest rates. And if your lender is applying your payment evenly to all of your loans, you probably won’t see much of a difference in your higher-interest-rate balances.
Call your lender and ask to have a larger percentage of your payment applied to your highest-interest rate loan. If you have some extra cash, consider making an additional payment and request that the money be applied to that same loan.
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How you repay your loan can increase payments
If you have federal loans, your payment plan may also be causing your monthly bill to go up.
For instance, the graduated repayment plan for federal loans starts with lower payments, which then increase every two years.
A standard repayment plan comes with fixed payments, so you won’t notice an increase in your monthly amount. That’s why many people opt for this plan.
And an income-based repayment plan is set up to be more affordable, since your monthly payments will be 10% or 15% of your discretionary income. This type of repayment plan can be helpful if you have a high debt relative to your income.
However, payments for income-based repayment plans are recalculated each year based on your updated income and family size. So if those things have changed, you may notice an increase in your monthly payment.
The government has several other repayment plans that can help make your payments more manageable. Check out the federal repayment estimator to help determine the best plan for you.
Learn how to lower payments for your federal or private student loans.
Can deferment or forbearance help?
If you’re strapped for cash and worried about making a late payment on your loan, then deferment and forbearance are two terms you need to know.
Forbearance and deferment are sometimes used interchangeably, but the two terms (and what they represent) are drastically different.
Deferent is a temporary postponement of payment on a loan that is allowed under certain conditions and during which interest generally doesn’t accrue. So, you truly have a hold on all financial aspects of your loan, including the interest.
A forbearance, which is a temporary hold on your loan payment, can be granted by a lender if you are facing financial hardship, like a serious medical problem. Learn more about forbearance for federal and private student loans.
However, the interest will continue to accrue while your loan is put on hold during a forbearance. That will balloon the size of your overall debt, plus you’re likely to face larger monthly payments after the forbearance period is over.
To find out if refinancing could help you stay current on your monthly student loan payments, check out our Student Loan Refinancing Calculator.