Most student loan borrowers realize that the monthly accrual of interest is the reason it takes forever to repay student loans. As a result, we closely watch the portion charged as interest on each payment. Sometimes the interest charges actually increase — even if the borrower hasn’t missed a payment or made a mistake.
These interest fluctuations are frustrating but normal in most cases. However, the extra interest charge may also point to a bigger issue. Today I’ll cover the different explanations for the change in interest. Most importantly, I’ll highlight how to tell when your lender or servicer made a mistake and how to fix it.
Monthly Interest Charges Should Go Down Slightly Each Month
If you have a student loan, your loan generates interest daily. At the conclusion of each month, lenders add up the interest generated and deduct the interest charges from your monthly payment.
For borrowers in repayment, the interest charges should be steadily going down. When you start repayment, it is common for most of the early payments to count as interest. As your student loan debt shrinks, it generates less interest.
The change in monthly interest is usually slight, sometimes less than a dollar. However, this monthly decrease shows the progress of repayment. As the debt is eliminated, the final payments will count almost entirely towards the principal.
If Interest Charges Go Up, The Length of the Month Could Explain It
If the interest charges were slightly higher this month than they were last month, take a look at the date range for the monthly bill.
A 31-day month will generate more interest than a 28-day month. For many borrowers, this simple difference will explain a one-month increase in interest charges.
However, if the jump in interest charges is significant or has gone up for several months, there is another issue.
Variable-Rate Loan Changes
The interest rate on a variable-rate loan usually changes on yearly, quarterly, or even monthly updates.
This particular interest issue is easier to identify for a couple of reasons. First, the interest rate on the loan should be easy to find and identify on the bill. Secondly, when the interest rate increases, the monthly bill often increases with it.
Unfortuantely, borrowers cannot prevent a variable-rate loan increase. The terms of the original student loan contract will specify how often the rate can go up and whether or not there is a cap on interest.
Those that wish to convert their variable-rate loan can refinance their student loan into a fixed-rate loan. However, they will have to pass a credit check to make the change.
Many lenders offer a slight interest rate discount for scheduling automated payments. With most lenders, the interest rate reduction is .25%.
If you had previously been getting this discount and then terminated the auto-debits, it would explain a slightly larger interest charge for the month.
In the category of unlikely but possible explanations, we have interest capitalization.
Even though a student loan generates interest daily, that interest isn’t immediately added to the principal balance. For borrowers, this is a good thing because we don’t immediately start paying interest on the interest. When the interest capitalizes, it gets added to the principal balance, and the now larger principal balance starts generating more interest.
There is a long list of items that can trigger interest capitalization on federal student loans.
This particular explanation is unlikely because the events that trigger capitalization usually apply to borrowers who are not actively in repayment.
Identifying and Fixing Lender Mistakes
A lender or loan servicer mistake may also cause a change to your monthly bill. Identifying these mistakes can be tricky, and getting the student loan company to admit and fix an error is even more difficult.
To determine if there was a mistake, first review the other possible reasons for a larger interest payment previously mentioned in this article. If you can eliminate all of the reasonable explanations, looking for an error is the next challenge.
The best way to find an error is to put 2-3 billing statements side-by-side. Look for any changes or inconsistencies. If there is a number that doesn’t make sense or a new charge, reach out to your student loan company. If possible, have the conversation via email (it is much easier to hold them accountable for their statements if you have proof of what you were told).
Because errors can happen in many ways, there is no one-size-fits-all approach to finding these issues. The critical thing to keep in mind is that all the numbers should add up. If you do the math and can’t make sense of your bill, it is the job of your student loan company to help you understand what you are being charged and why.
Getting a Lower Interest Rate
If interest is the biggest obstacle to eliminating student debt, then getting a lower interest rate is the best shortcut to debt freedom.
This site has identified 14 different ways to get a lower student loan interest rate. Depending upon your circumstances, a few minutes of time could save hundreds or even thousands of dollars over the life of the loan.