You may have seen the term “capitalized interest” on your student loan documentation and wondered what it meant. Capitalized interest is the interest that is added to your loan balance when your lender defers or forbears payment on your loan.
Checkout this video:
What is capitalized interest?
Capitalized interest is the interest that accrues on your student loan during periods of deferment or forbearance. When you enter repayment, all of the interest that has accrued—plus any fees that have been added to the balance—is capitalized, or added to your principal balance. This means you’ll have to pay interest on a higher principal balance, which can cost you more money in the long run.
How is capitalized interest calculated?
Capitalized interest is the amount of interest that is added to the principal balance of your loan. This happens when the interest is not paid as it accrues during periods of deferment or forbearance, or when the payments you make are not enough to cover the accruing interest. When this happens, your lender will add the unpaid interest to your principal balance. This will increase the amount you owe and will cause you to pay more in interest over time.
To calculate capitalized interest, your lender will first add all of the unpaid interest that has accrued since your last payment. They will then add this amount to your outstanding principal balance. This new balance is used to calculate your next periodic payment amount, which will be higher than it would have been if you had paid the interest as it accrued.
Capitalized interest can have a significant impact on the total cost of your loan and on your monthly payments. It is important to remember that any time you defer or forbear your loans, there is a chance that some of the interest will be capitalized. You can avoid this by making sure to pay at least the accruing interest each month, even during periods of deferment or forbearance.
How does capitalized interest affect your loan?
Capitalized interest is the interest that accrues on your student loan during periods of deferment or forbearance. When you enter repayment, your monthly payment will include this accrued interest, as well as the principal balance of your loan.
The interest on your loan may also be capitalized if you make a late payment or if you allow your loans to go into default. In these cases, the entire unpaid interest balance will be added to your principal balance, and you will be responsible for repaying this amount plus any additional interest that accrues going forward.
Capitalized interest can quickly increase the size of your loan and the amount you owe each month, so it’s important to stay on top of your payments. If you’re having trouble making payments, contact your lender or servicer to discuss your options and avoid having your interest capitalize.
What can you do to minimize capitalized interest?
Capitalized interest is the unpaid interest that is added to your principal balance. This happens when you defer or forbear your payments, or if you have a period of grace before repayment begins.
You can minimize capitalized interest by making interest-only payments during periods of deferment or forbearance. You can also request that your servicer capitalize your interest only once during your repayment term.