The short answer is some of those who took out education loans had no understanding of how loans work. Some percent of students (Grok suggests 20%) made “minimum payments”, which at best was paying only the interest on the loan and not paying down any of the original loan principle amount.
With minimum payments, the loan is not being paid off – and may grow larger. I saw a post (similar to many) from someone saying she took out a $29,000 loan for her Masters degree, but today owes $160,000. The only way that occurred is because she failed to make appropriate payments over the years – and she still has no understanding of how loans work.
Instead she blames “predatory lending” and believes taxpayers should bail her out from her loan.
Why can’t you discharge an education loan by filing bankruptcy?
Because the loan has no collateral. If you borrow money to buy a car, and file bankruptcy, the lender can repossess your car. With an education loan, there is nothing to repossess. A bankruptcy filing is then risk-less to the borrower – and in the past, some students did file bankruptcy to eliminate their loans – at no risk to themselves.
Another Complication
In recent years, politicians enacted loan suspension programs (e.g. Covid) and proposed that taxpayers bail out education loans. This led former students (often now educated employed professionals) to believe they would never have to pay off their loans. In fact, many loan borrowers have had a 5-year pause in making payments – with the interest rate set to zero during the Covid era.
During the suspension, interest did not accrue on the loan balance (effectively this was paid for by taxpayers). However, there were some loans and other private loans where missed interest payments did accumulate, causing the loan balance to rise.
Grok AI
Yes, it’s likely that students who owe more than they borrowed are making minimum payments that primarily cover interest, leaving the principal untouched or even growing due to accrued interest. This is common with federal student loans, especially for borrowers in income-driven repayment (IDR) plans or during periods of deferment/forbearance.
Here’s why:
- Interest Accrual: Student loans accrue interest daily. If a borrower makes only the minimum payment, it may cover just the interest (or less), leaving the principal intact. For example, on a $30,000 loan at 5% interest, annual interest is ~$1,500. If the minimum payment is $125/month ($1,500/year), it barely covers interest, and any unpaid interest can capitalize, increasing the principal.
- Income-Driven Repayment Plans: IDR plans (e.g., PAYE, REPAYE) base payments on income, which can result in payments lower than the accruing interest, especially for low earners. Unpaid interest may capitalize, increasing the loan balance. For instance, a borrower earning $30,000 with $50,000 in loans might have a minimum payment that doesn’t cover the full interest, causing the balance to grow.
- Deferment/Forbearance: During these periods, interest accrues on unsubsidized loans (and subsidized loans in some cases). If not paid, it capitalizes, adding to the principal. Borrowers resuming payments may face a higher balance.
- Loan Terms and Amortization: Standard repayment plans (e.g., 10-year) typically cover both interest and principal, but extended or graduated plans start with lower payments that may not reduce principal early on. Minimum payments on private loans can also be interest-heavy if terms prioritize low initial payments.
Data supports this: A 2023 report from the U.S. Department of Education noted that about 20% of borrowers in IDR plans had loan balances higher than their original amounts after years of payments, often due to interest accrual outpacing payments. Negative amortization—where payments don’t cover interest—is a key factor.
However, not all minimum payments fail to reduce principal. In standard or fixed repayment plans, payments are structured to cover both interest and principal, though early payments skew heavily toward interest. Borrowers can confirm this by checking loan statements, which break down how payments are applied.
To avoid this trap, borrowers can:
- Pay more than the minimum to tackle principal.
- Choose standard repayment over IDR if affordable.
- Make interest payments during deferment/forbearance to prevent capitalization.
