I see this from time to time on social media about people saying they graduated college a long time ago with X-amount of school loans, and they’ve been paying it but then still owe more then the original loan amount. How is this even possible? Don’t all loans calculate the monthly bill for interests and enough principle for it to not increase?
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Well… No. Predatory loans often come with terms where the minimum payment is insufficient to cover interest and thus the debt keeps growing.
Credit cards are the most common form of this but also things like payday loans and, yes, some student loans.
After all, they keep paying so where’s the loss for the lender?
Dude interest on these loans is up to 9.5% and the loans are in the low 6-figures. You could pay thousand/month and fall behind.
Idc what the boomers want us to believe. Student loans are awful
Some student loans will let you make an income-based minimum monthly payment that totals less than the interest that accumulates in that time. This means you’re “current” with your payments and won’t get sent to collections, but you’re not paying enough to decrease the amount you owe (because of the interest). This is why many people who believe in some amount of student debt relief will often ask that interest rates be lowered, at least.
Assuming you are asking about how the payments were structured to make this possible and I am going to try to avoid talking about current rates and actual numbers (which are high).
Most likely, they are on an income based repayment plan, but there are a few possibilities.
The first possibility is a forbearance. This is where a temporary pause is placed on loan payments, but interest is still being generated. So the amount owed climbs fairly quickly. If something happens, such as losing a job (common during covid), people could request a forbearance for temporary economic relief, even though it costs them extra $ in the long run.
But if they have been making regular payments as you say, they may be set up on an ‘extended repayment plan’ or an ‘income based repayment plan’.
Under the extended plan, early payments typically only cover the generated interest, so the amount owed doesn’t go down despite payments being made until the payments rise over time. The idea is that the first few years are easier payments to allow the borrower time to find a job and work their way up from entry level. It is a theoretically fine idea, but it costs more overall.
An income based plan is exactly what it sounds like. If their income is lower, their payments will be lower – but perhaps too low to cover the generated interest, causing their overall balance to increase despite making all their payments.
I think the biggest answer is that while you do not have to start paying back the loans until you start making money after college, it’s accruing interest from day 1 of the loan.
What are interest rates on student loans like?
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