A reader writes:
I have just began making payments on my loan after being in a forbearance for the last year. When I looked at my bill, I was very disturbed to find my total balance had went up significantly from my original balance. Why has my student loan company done this and are they allowed to?
What happened to you is due to a thing called interest capitalization. Interest accrues daily on loans but it almost always accrues separately from the principal balance. The exception to this is after a forbearance, deferment, or when entering repayment. During these times your interest is added to your principal balance thus increasing that balance. This will affect you in the future as your interest is based on your principal. The larger your principal, the larger your daily interest. The lesson in this is that if you are ever able to pay anything while in school or on a forbearance or deferment, it will help you in the longer run!
As far are they allowed to? Absolutely. This is one of things you agreed to as part of your Master Promissory Note when you took out the loan. Just be aware of it for the future since we all would like to escape this experience with as little of overall damage as possible!