Capitalized InterestCapitalization of interest occurs when unpaid accrued interest is added to your principal balance. With student loans this typically happens anytime your loan enters repayment (i.e. at the end of grace, deferment, and forbearance periods).
Subsidized (Stafford, Perkins, and some Consolidation) loans do not accrue interest while you are in school, grace, or during any authorized deferment periods. Unsubsidized (Stafford, PLUS, and some Consolidation) loans are always accruing interest. During periods of forbearance and repayment all loans accrue interest.
While you are in school, grace, deferment or forbearance you have the option of making interest payments or allowing the interest to accumulate. If you allow it to accumulate it will be capitalized at the end of each grace, deferment, or forbearance period.
Allowing a small amount of interest to be capitalized may not be overly harmful, but continually allowing interest to accumulate and be capitalized can dramatically increase your overall loan balance.
Here is an example:
|Year||Loan Balance||Interest Rate||Daily Interest||Yearly Interest Accrual||New Balance
We highly recommend trying to pay at least some of the interest that is accruing on your loans during in-school, grace, deferment, and forbearance periods. Even $5, $10, or $20 per month will help reduce the total amount capitalized.