Why you’re paying back more than you borrowed

How interest rates affect what you owe

If your grace or separation period is ending soon, you’re probably gathering all your loan information to stay on top of everything. You log in to your lender’s website but see that the amount you owe is more than you borrowed. Let’s clear up the confusion and talk about why this is the case.

The basics of interest rates

The main reason you're paying back more than you borrowed is interest, the amount you’re charged from a lender who took the risk of lending you the money. A Sallie Mae study, Majoring in Moneyfound that a quarter of young adults don’t have an understanding of how interest rates (the percentage of interest you agree to pay to borrow money) work. Knowing the facts on student loan interest rates is crucial to understanding the amount you have to pay back. 

Interest accrues–even while you’re still in school

Having loans does not mean taking out a certain amount of money and paying that same amount back. There are two reasons that you’ll pay back more—accruing interest and capitalization.

  • Interest starts to accrue (grow) as soon as you take out your loan, and it continues to add to the amount you’ll have to pay back. NOTE: The exception is a subsidized federal student loan; the government pays the interest while the student is in school, grace period, or deferment. 
  • Capitalization happens when unpaid interest is added to your loan’s principal (the amount you borrowed). You’ll essentially be paying interest on top of interest. 


  • Original amount borrowed: $30,000 at 3% fixed interest rate
  • Accrued interest after school and your six-month grace period$3,825 (if you haven’t made any payments during that period) 
  • When it’s time to start repaying your loan, that $3,825 will be capitalized—added to your $30,000 principal (so your future payments will be based on $33,825)
  • If you’re paying off the loan over 15 years, you’ll end up paying a total of about $42,046 over the life of your loan*

It’s a good idea to make interest payments during school or during your grace period, if you can.

See how accrued interest could affect your loan balance with this accrued interest calculator.

* Assumes: no payments in school and grace; fixed interest rate; all payments are made in full.

Interest rates aren’t created equally 

Student loans shouldn't be treated the same across the board. Let’s say you have federal loans and private loans. Repayment for these loans can look completely different. A big reason for this difference is how interest rates affect the amount you have to pay back.

  • Federal student loans have a fixed interest rate that is set by the government each year. This interest rate stays the same for the timespan of your loan.
  • Private student loan interest rates can differ among lenders. The interest rate is set by the loan servicer and may be fixed or variable. A variable interest rate can go up or down depending on how the economy is doing. 

What to do if you can’t pay back your loans

If you’re having trouble paying back your student loans, there may be alternative options. Depending on your loan servicer, you may have options to temporarily lower or pause your loans.  

Keep in mind that federal student loans and private student loans each have different repayment options. If you qualify, federal student loans offer income-based repayment plans, temporary relief options, and programs for special situations. For private student loans, contact your loan servicer to know exactly what your options are.

Remember that student loans are not all the same. Stay on top of your student loans to keep your personal finances in check.

footnote Sallie Mae does not provide, and these materials are not meant to convey, financial, tax, or legal advice. Consult your own financial advisor, tax advisor, or attorney about your specific circumstances.

footnote External links and third-party references are provided for informational purposes only. Sallie Mae cannot guarantee the accuracy of the information provided by any third parties and assumes no responsibility for any errors or omissions contained therein. Any copyrights, trademarks, and/or service marks used in these materials are the property of their respective owners.

StudentHub by