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A friend and my niece both earned master’s degrees. Because of them, I’m learning about student loans — and why there is a student loan crisis in the U.S.
My learning began with conference calls between me, my friend, and her loan servicing agent. We had several questions, but the most important was why so much of each monthly payment was being applied to interest. Her interest rate was about 5%. Every month, she paid $150 to $200 more than required, hoping to quickly pay down the principal and pay off her loan. But every statement reflected between 26% and 28% of her payment being credited to interest. Finally, we were told interest is compounded daily. This didn’t quite “add up,” but we accepted the answer given. (Neither of us majored in finance.)
Currently, I am trying to help defray some of my niece’s student loan debt. Attempting online payments, I was confused. Though loan repayment is deferred for six-months (she graduated in December 2025), the system wouldn’t allow me to apply my payment to the principal. Any payment I attempted to make for a specific loan was directed first toward accrued interest.
The drawback of the interest-first allocation method is that, even if my niece makes more than the required monthly payment, generally it will result in a slower reduction in the principal balance, leading to more interest being paid over time compared to loans where payments are applied to the principal first. Lenders maintain that this practice ensures them compensation for the “time value of money.”
Because my niece was a graduate student, all her loans were “unsubsidized.” This means daily interest accrual started immediately upon each loan disbursement — even though repayment wasn’t scheduled yet because of her in-school status. Additionally, accrued interest is capitalized; in other words, unpaid interest is added to a loan’s principal balance, typically when a loan becomes eligible for repayment. When a payment on a loan does not cover interest, causing the unpaid interest to be capitalized, it is known as negative amortization. Future interest calculations, therefore, are based on a higher amount, ultimately leading to increased overall debt.
To minimize the negative impact, some recommend that a graduate student begin paying accrued interest before repayment is required (and the accrued interest is capitalized), if they have the means to do so. Full-time coursework and a clinical practicum can make this recommendation unrealistic.
Moreover, a federal student loan balance also may increase over time, rather than decrease as payments are made, because of negative amortization. For example, if a borrower has an Income-driven Repayment Plan, with monthly payments based on their income, the monthly payment they make may be less than the accrued interest, so the unpaid accrued interest is capitalized.
As you can deduce, trying to pay down or pay off a federal student loan can become a Sisyphean challenge!
The total aggregate student loan limit for a graduate student enrolled in “certain health professions” programs is currently $224,000 (applicable to my niece’s graduate program).
The interest rates on my niece’s various loans range from 7.050% to 9.080%. The average interest rate for a fixed, 30-year mortgage was approximately 6.15% as of December 31, 2025. A mortgage holds the house as collateral, while federal student loans are not collateralized. Does this account for the difference in repayment terms?
A 2024 report from SuperMoney said, “If our student loan balance were a national budget, it would be the sixth largest in the world….” As of September 2025, federal student loan debt was $1.67 Trillion. Total student loan debt was $1.81 Trillion.
One analysis found the U.S. ranks “among the most expensive countries for higher education, with average undergraduate tuition fees surpassed only by England.” Yes, tuition, fees, housing, food, transportation, etc., have increased significantly over the past twenty years. But according to an analysis last year, the increased costs of higher education have outpaced general inflation.
Perhaps I simply should be grateful our federal government offers loans to student borrowers. Yet, I am left wondering if the repayment terms set by the Department of Education (DOE) are the best we can offer those pursuing a postsecondary education.
To me, 2026 legislative changes seeking to improve the federal student loan program fail to address the institutional decisions that have helped to create the present crisis, which include the terms and conditions of federal student loans as determined by the DOE (particularly as they relate to interest accrual and capitalization), as well as the burgeoning cost of a college/university education. Instead, the changes simply place more undue pressure on student borrowers.
Research by Our World in Data reveals that government “investing in education yields both private and social returns. Private returns to education include higher wages and better employment prospects. Social returns include pro-social behavior.” The report further states that “adults with higher qualifications are more likely to report desirable social outcomes, including good or excellent health, participation in volunteer activities, interpersonal trust, and political efficacy.”
Is it not in our nation’s best interests that there are individuals willing to commit themselves to the pursuit of a postsecondary education?
A longtime Colorado resident, Denise Fazio spent most of her career in Human Resources, working in the corporate and the nonprofit arenas. Now retired, she continues to be involved with various organizations and causes, dedicating a good deal of her time to writing projects and virtual volunteering. Her previous letters to the editor and guest opinions can be found in a variety of Colorado news publications.
