Credible
Get Rates
  • Refinance Student Loans
    • Compare Options
      • Best Refinancing Companies
      • Lender Reviews
      • Refinance Student Loans
      • Student Loan Consolidation
    • Learn the Basics
      • Fixed vs. Variable Rates
      • Forgiveness Programs
      • Consolidation vs Refinancing
      • Repayment Plans
      • More on Student Refi
    • How to
      • Consolidate Your Student Loans
      • Pay Off Your Student Loans
      • Lower Your Interest Rate
    • Tools
      • Current Student Loan Refi Rates
      • Refinancing Calculator
      • Repayment Calculator
      • Student Loan Score Calculator
  • Student Loans
    • Compare Options
      • Private Student Loans
      • Parent Student Loans
      • Law School Loans
      • Medical School Loans
      • Graduate Student Loans
    • Learn the Basics
      • Student Loan Limits
      • Living Expenses
      • Applying for FAFSA
      • Federal Student Loans
      • Student Loan Interest Rates
      • More on Student Loans
    • How To
      • Pay for College
      • Take Out Student Loans
      • Apply Without Cosigner
      • Apply for Student Loans
      • Pay for Grad School
    • Tools
      • Best Private Student Loans
      • Current Student Loan Rates
      • Student Loan Interest Calculator: Estimate Payments
      • Lender Reviews
  • Personal Loans
    • Compare Options
      • Best Personal Loan Lenders
      • Lender Reviews
      • Get Personal Loan Rates
    • Learn the Basics
      • How to Qualify
      • How to Get a Loan
      • Where to Get a Loan
      • Personal Loans with Cosigner
      • Pay Off Credit Card Debt
      • More on Personal Loans
    • Best for
      • Credit Card Consolidation
      • Debt Consolidation Loans
      • Home Improvement Loans
      • Good Credit
      • Fair Credit
      • Bad Credit
    • Tools
      • Current Personal Loan Rates
      • Personal Loan Calculator
  • Mortgages
    • Compare Options
      • Mortgage Refinance
      • Home Loan
      • Best Mortgage Refinance Companies
      • Best Mortgage Lenders
      • Mortgage Preapproval
      • Mortgage Payment Calculator
    • Compare Rates
      • Mortgage Refinance Rates
      • 30-Year Fixed Refinance Rates
      • 15-Year Fixed Refinance Rates
      • Home Loan Rates
      • 15-Year Fixed Mortgage Rates
      • 30-Year Fixed Mortgage Rates
    • Learn the Basics
      • How to Buy a House
      • How to Refinance Your Mortgage
      • How to Get the Best Rate
      • Cash-Out Refinancing
      • More on Home Loans and Refi
    • Pay Off Mortgage
      • Home Equity to Pay Off Debt
      • Paying Off Mortgage Early
      • Mortgage Refinance Cost
  • Insurance
    • Insurance Products
      • Insurance Products
      • Learn more about home insurance
    • Compare Options
      • Compare Insurance Quotes
      • Home Insurance Guide
    • Learn the Basics
      • What Home Insurance Covers
      • How Much Home Insurance You Need
      • Estimate Your Home Replacement Cost
      • How to Change Home Insurance
  • Company
    • About
    • Reviews
    • Blog
    • Lenders
    • Editorial Guidelines
    • FAQs
    • Press
  • Find My Rate
Advertiser Disclosure

What Is Capitalized Interest on Student Loans?

When unpaid interest on your student loans is capitalized, your monthly payment and interest charges may go up.

Matt Carter Matt Carter Edited by Ashley Harrison Updated October 6, 2021

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

Capitalized interest is unpaid interest that’s added to your student loan balance after you leave school, change repayment plans, or are granted relief from your payments.

Once your unpaid interest is capitalized (added to your loan principal), your monthly payment and interest charges may go up, increasing your total repayment costs. So it’s best to avoid interest capitalization if you can.

Here’s how unpaid interest may capitalize:

  • When you leave school
  • When you’re granted payment relief
  • When you leave income-driven repayment
  • When you consolidate your loans

How interest capitalizes when you leave school

With federal student loans and most private student loans, you can choose to make partial payments while attending school or put off repaying your loans altogether until six months after leaving school.

Let’s say each year you’re in college, you borrow up to the maximum limit for federal direct unsubsidized student loans for undergraduates. If you graduate in four years, you’ll take out a total of $27,000 in loans. But when your $3,511 in unpaid interest is capitalized six months after graduation, your loan balance will grow to $30,511.

Year in schoolAmount borrowedInterest rate
Months before capitalization
Capitalized interest
Freshman$5,5004.53%
54
$1,121
Sophomore$6,5004.53%
42
$1,031
Junior$7,5004.53%
30
$849
Senior$7,5004.53%
18
$510
Total$27,000$3,511
Make partial payments in school. In the example above, you could save close to $900 by paying the interest on your loans while you’re in school. Your monthly payments would start out at $21 as a freshman, rising by about $25 each year to $102 a month as a senior.

How much does capitalized interest increase your monthly payment and total repayment?

  • If your loan balance had stayed at $27,000: Your monthly payments on the standard 10-year repayment plan would have been about $280 a month, totalling $33,626.
  • After interest capitalization: The monthly payments on your $30,511 loan balance would be $317 a month for 10 years, a total of $37,998.

That’s a difference of $4,372. This is a good example of why need-based federal subsidized student loans are such a good deal — you’re not charged interest while you’re in school, during your 6-month grace period, or if you’re granted deferment.

Student Loan Interest Rates: Federal, Private, and Refinancing

How interest capitalizes when you’re granted payment relief

Unpaid interest may accrue when you’ve been granted temporary forbearance or deferment of your loan payments. You may be granted forbearance or deferment if you lose your job or go back to school after you graduate.

Let’s say that after your grace period, you decide to go to graduate school instead of getting a job. You defer payments on your $30,511 in undergraduate loans for three years while you’re in law school, plus an additional six months while you take the bar exam and land a job.

Cost to defer $30,511 in undergraduate loans at 4.53% interest:

Months in defermentUnpaid interestNew loan balance (if capitalized)
6$691$31,202
12$1,382$31,893
24$2,764$33,275
36$4,146$34,657
42$4,838$35,349

If you defer payments for 42 months on $30,511 in loans that you’re paying 4.53% interest on, you’ll rack up another $4,838 in unpaid interest charges. When that interest is capitalized, your outstanding loan balance will grow to $35,349.

This means the outstanding balance on the original $27,000 you borrowed to earn your bachelor’s degree has now ballooned by $8,349, as unpaid interest was capitalized after you earned each of your degrees.

Avoid deferment or forbearance. If you have federal loans and qualify for income-driven repayment, an IDR plan can make your monthly payments more manageable, and you may rack up less unpaid interest.

Student Loan Deferment and Forbearance: Everything Borrowers Need to Know

How interest capitalizes when you leave income-driven repayment

Unpaid interest can also pile up when you’re enrolled in an income-driven repayment plan. This happens if your monthly payments aren’t big enough to cover the interest you owe.

Unpaid interest that accrues in an IDR plan may be capitalized if you:

  • Voluntarily leave the Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), or Income-Based Repayment (IBR) plans
  • Fail to recertify your income each year you’re enrolled
  • No longer qualify for the PAYE or IBR plans based on your income

When unpaid interest is capitalized in an IDR plan

The unpaid interest that you rack up while you’re enrolled in most IDR plans is not capitalized — added to your principal — until you leave the plan or qualify for loan forgiveness. In an IDR plan, you may not be paying down the principal, but it can’t get any bigger while you remain in the plan. The only exception is ICR, where unpaid interest is capitalized annually.

Thanks to the unpaid interest benefit, interest capitalization may be of little or no concern if you leave an IDR plan after only being enrolled for three years or less. Also, if your monthly payments were big enough to cover the interest owed, you wouldn’t have any unpaid interest added to your loan balance no matter how long you were in an IDR plan.

But interest capitalization can be an issue for borrowers who have been enrolled in an IDR for an extended period of time — particularly if they have been paying back student loan debt that exceeds their annual income.

Review your payment history. If you’re thinking of leaving an IDR plan, you can check your payment history with your loan servicer to see whether any unpaid interest will be added to your unpaid principal.

Unpaid interest benefit: PAYE and IBR

Most IDR plans have several features that limit the impacts of unpaid interest. For the first three years you’re enrolled in PAYE and IBR, you’re off the hook for unpaid interest on need-based federal direct subsidized loans.

Whatever interest your monthly payment doesn’t cover is waived. But keep in mind that for PAYE and IBR, the unpaid interest benefit only applies to need-based subsidized loans.

Unpaid interest benefit: REPAYE

The REPAYE plan has a more generous unpaid interest benefit that also applies to unsubsidized loans. Half of unpaid interest on unsubsidized loans is waived for as long as you are in the program. All unpaid interest on subsidized loans is waived for the first three years; after that the government picks up half the tab.

No unpaid interest benefit: ICR

The least generous (and least used) IDR plan, ICR, provides no interest benefit. If your monthly payment doesn’t cover all the interest on your loans, you’re still on the hook.

How interest capitalizes when you consolidate your loans

If you decide to combine several federal loans into a federal Direct Consolidation Loan, any outstanding interest on the loans that you consolidate becomes part of the original principal balance on your consolidation loan.

This is something to keep in mind if you’ve been racking up unpaid interest during your grace period, in an IDR plan, or in deferment or forbearance. If federal loan consolidation triggers capitalization of unpaid interest, you may pay interest charges on a higher principal balance than might have been the case if you hadn’t consolidated.

The same can happen if you refinance federal student loans with a private lender. If you’re enrolled in an IDR plan, and unpaid interest has been racking up because your monthly payments didn’t cover the interest you owed, refinancing can trigger capitalization.

Check your accrued interest. Before consolidating or refinancing federal student loans, ask your loan servicer for a payment history showing the amount of accrued interest on each loan.

Learn More: Student Loan Consolidation vs. Student Loan Refinancing

Find out if refinancing is right for you

  • Compare actual rates, not ballpark estimates – Unlock rates from multiple lenders with no impact on your credit score
  • Won’t impact credit score – Checking rates on Credible takes about 2 minutes and won’t impact your credit score
  • Data privacy – We don’t sell your information, so you won’t get calls or emails from multiple lenders

See Your Refinancing Options
Credible is 100% free!

Trustpilot

How to avoid capitalized interest

While it would be nice if you could avoid capitalized interest altogether, in many cases it’s not possible.

You’re given the option of not making loan payments while you’re in school because most of your time will be devoted to your studies. After you’ve graduated, if you need a break in your payments, it’s usually because you’ve run into unexpected financial difficulties.

But if your finances allow, here are three strategies for avoiding capitalization of unpaid interest:

  1. Make partial payments while in school: If you can pay just the interest you owe, or some portion of it, that will reduce the amount of unpaid interest that’s capitalized after you leave school.
  2. Avoid deferment or forbearance: If you have federal loans and qualify for income-driven repayment, an IDR plan can make your monthly payments more manageable, and you may rack up less unpaid interest
  3. Take care of unpaid interest before it’s capitalized: If you’re planning to leave an income-driven repayment plan, or are facing another event that can trigger capitalization, paying off any unpaid interest will prevent it from being added to your loan balance.

See: 11 Strategies for Paying Off Your Student Loans Faster

About the author
Matt Carter
Matt Carter

Matt Carter is an expert on student loans. Analysis pieces he’s contributed to have been featured by CNBC, CNN Money, USA Today, The New York Times, The Wall Street Journal and The Washington Post.

Read More

Home » All » Student Loan Refinancing » What Is Capitalized Interest on Student Loans?

Paying Off Student Loan Debt


  • How to Pay Off Student Loans
  • How to Lower Your Monthly Payment
  • How to Lower Your Interest Rate
  • Paying Off Student Loans Fast
  • How to Pay Off Student Loans Early
  • Pay Off Student Debt or Invest?

Compare Your Student Loans

  • Calculate Student Loan Score
  • Student Loan Repayment Calculator
  • Student Loan Refi Calculator

👇 CARES Act Info 👇

  • COVID-19 Student Loan Relief

Guides

  • How to Pay Off $30k in Student Loans
  • How to Pay Off $50k in Student Loans
  • How to Pay Off $100k in Student Loans
  • How to Pay Off $200k in Student Loans

Refinancing Guides

  • How to Refinance Student Loans
  • Refinancing Federal Student Loans
  • Refinancing Private Student Loans
  • Consolidating Student Loans
  • When to Refinance Student Loans
  • How to Refinance with Bad Credit

Additional Resources

  • Current Student Loan Refi Rates
  • List: Student Refi Lenders
  • List: Parent Plus Refi Lenders
  • No Degree Needed Refi Companies
  • Lender Reviews

  • Click to share on Facebook (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to share on Twitter (Opens in new window)
  • Click to email a link to a friend (Opens in new window)

Related Articles

Student Loan Refinancing

Are Student Loans Compound or Simple Interest?

Student Loan Refinancing

The Federal Student Loan Repayment Calculator – Strengths and Limitations

Student Loans

Private Student Loan Repayment Options

  • Read More
    • Refi Student Loans
    • In School Loans
    • Personal Loans
    • Mortgages
    • Insurance
  • Resources
    • Lender Reviews
    • Loan Calculators
    • Student Loan Score Calculator
    • Data Insights
    • Debt Statistics
    • Sitemap
  • Compare
    • Student Loan Refinance
      • Current Student Loan Refi Rates
    • Student Loan Consolidation
    • Private Student Loans
      • Current Student Loan Rates
    • Personal Loans
      • Current Personal Loan Rates
    • Refinance Mortgage
      • Mortgage Refinance Rates
        • 15-Year Fixed Refinance Rates
        • 30-Year Fixed Refinance Rates
    • Home Loans
      • Home Loan Rates
        • 15-Year Fixed Mortgage Rates
        • 30-Year Fixed Mortgage Rates
    • Insurance
  • Top Lenders
    • Best Student Loan Refi Companies
    • Best Private Student Loans
    • Best Personal Loans
    • Best Mortgage Lenders
    • Best Mortgage Refinance Companies
  • Company
    • About
    • Reviews
    • Blog
    • Editorial Staff
    • Editorial Guidelines
    • News
    • Press
  • Legal
    • Terms of Use
    • Privacy Policy

© 2023 Credible


Credible Operations, Inc. NMLS ID# 1681276 | NMLS Consumer Access | Licenses and Disclosures
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.