Capitalized interest is unpaid interest that gets added to your student loan’s principal balance. Because that balance has increased, subsequent interest may be charged on that new, larger amount. For student loans, capitalization only occurs under certain conditions, such as if you’re in a forbearance period or on an income-driven repayment (IDR) plan. Learn more about capitalized interest on student loans as well as how to manage the impact of student loan interest.

🅷Understanding Capitalized Interest on a Student Loan

What Causes Interes꧋t to Capitalize on Student Loans?

There are two types of student loans: 澳洲幸运5官方开奖结果体彩网:subsidized and unsubsidized. With subsidized loans, the government covers the interest charges while you’re in school, so interest won’t accrue until you graduate or drop below♈ half-time e🎃nrollment.

Both the federal government and private lenders offer unsubsidized loans, in which interest accrues while you’re in school, even if you aren’t required to make payments during th🌳is time.

Depending on the details of your loan (i.e., whether they’re 澳洲幸运5官方开奖结果体彩网:federal or private, if the United States Department of Education is managing them, etc.), the circumstances under which capitalization can occur on your student loans may include:

• Once your 澳洲幸运5官方开奖结果体彩网:grace period ends (unsubsidized loans only)
• After a 澳洲幸运5官方开奖结果体彩网:deferment (unsubsidized loans only) or 澳洲幸运5官方开奖结果体彩网:forbearance period ends
• If you’re on an 澳洲幸运5官方开奖结果体彩网:income-driven repayment (IDR) plan and your monthly payment is less than the amount of interest that accrues
• If you’re on the income-based repayment (IBR) plan and no longer qualify or choose to leave it

Example of How Much Capitalized Interest Costs

Suppose you’re attendin🌼g a four-year college. In order to fund your education, each year you borrow $10,000 from a private lender at a 5% interest rate. Payments aren’t required while you’re in school, but interest will still accrue during that time and will capitalize once you graduate.

You can calculate your dai𓃲ly interest charge by dividing 5% by 365, which equals 0.000136. Next, multiply this amount by $10,000 to get your daily interest charge of $1.36.

Eac🌺h day after taking out the initial loan, you’re being charged approximately $1.36 in interest. That’s $40.80 in interest charges per month, or $489.60 per year. Below is how much capitalized inter🎉est will have accrued on all four of those $10,000 loans by the time you graduate, assuming no early payments.

After capitalization, your new principal balances will be $11,958.40, $11,468.80, $10,979.20🥀, and $10,489.60, respectively. All four loans will now have higher daily interest rates, significantly increasing the cost of your loans in the long term. If your student loans had been subsidized, you would’ve had the same $1.36 daily interest charge after you graduated.

Impact of Capitalized Interest on Student Loans

Capitalization increases your total loan balance due to the added interest becoming part of your outstanding loan balance. Since you’ll owe more than you originally borrowed, your monthly payment may also increase. Having to put more money tow♊ard paying a capitalized student loan means saving less for other things, including emergencies, retirement, or a majo♏r purchase.

This likely won’t be a concern for borrowers on IDR plans, which base their monthly payments on a percentage of your 澳洲幸运5官方开奖结果体彩网:discretionary income. While unpaid interest will still capitalize if your monthly payments are less than what accrues each month, any remaining loan balance after the repayment period ends is ultimately forgiven.

How to Avoid or Minimize Capitalized Interest

If you’re concerned about capitalized interest on your student loans, the best way to lessen or negate it entirely is to keep making payments, even if they aren’t required. If you have the funds, putting even a few dollars toward your unsubsidized loans every month 澳洲幸运5官方开奖结果体彩网:while you’re in school, during your grace period, or while in deferment can help you avoid higher capitalization costs in the long term. If the Education Department isn’t managing your loans and they’re in forbearance, the same advice applies.

The Bottom Line

Capitalized interest on a student loan can significantly increase how much you owe on your student loans by the time you start repayment. If you can avoid capitalization by getting a subsidized loan, it could save you hundreds or even thousands of dollars in the long run. If you can't avoid it, try making payments while you're in school (or whenever else you aren’t required to make payments) to lessen the impact of capitalization down the line.