Clients are often shocked to discover that the balances due on their student loans are much higher than their original loans. They are wondering how a $30,000 student loan balance is now $55,000 plus interest. The first question I ask is how many deferments or forbearances have they used, and when was the last time they made a payment. The answer is typically they have been in deferments and forbearances for quite a while, and have made very few payments. In that case, the answer for the rise in the principle is interest capitalizing.

Although student loan payments are not due while you are attending school, any unsubsidized loans continue to accrue interest. If your loans are in deferment or forbearance, interest continues to accrue on most loans. Once you are required to start making payments, the unpaid interest is added to the balance due, and interest begins to grow on the new balance. For example, if the original loan is $15,000, and $10,000 of unpaid interest accumulated while you were in school or in loan deferment, when you have to start making payments, the new principle is $25,000, plus interest. That is due to capitalized interest.

You can reduce capitalized interest by making interest payments while attending school or during any deferments and forbearances. Even a small or partial payment will help. You can also make extra payments during repayment periods if you think you will get a forbearance or deferment in the near future. If you are unable to make these payments, some people rely on family to help them make interest payments until they are able to make regular payments.

Your monthly student loan payment could be much lower if you can avoid capitalized interest. This is especially true for private student loans due to limited repayment options. If you ignore it, be prepared to pay back a larger loan balance.