{"id":37661,"date":"2019-11-13T10:17:31","date_gmt":"2019-11-13T18:17:31","guid":{"rendered":"https:\/\/www.credible.com\/blog\/?p=37661"},"modified":"2021-10-06T08:12:20","modified_gmt":"2021-10-06T15:12:20","slug":"capitalized-interest","status":"publish","type":"post","link":"https:\/\/www.credible.com\/blog\/refinance-student-loans\/capitalized-interest\/","title":{"rendered":"What Is Capitalized Interest on Student Loans?"},"content":{"rendered":"<p>Capitalized interest is unpaid interest that\u2019s added to your student loan balance after you leave school, change repayment plans, or are granted relief from your payments.<\/p>\n<p>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\u2019s best to avoid interest capitalization if you can.<\/p>\n<p><b>Here\u2019s how unpaid interest may capitalize:<\/b><\/p>\n<ul>\n<li><a href=\"#when-you-leave-school\">When you leave school<\/a><\/li>\n<li><a href=\"#when-you-are-granted-payment-relief\">When you\u2019re granted payment relief<\/a><\/li>\n<li><a href=\"#when-you-leave-idr\">When you leave income-driven repayment<\/a><\/li>\n<li><a href=\"#when-you-consolidate-your-loans\">When you consolidate your loans<\/a><\/li>\n<\/ul>\n<p><a name=\"when-you-leave-school\"><\/a><\/p>\n<h2>How interest capitalizes when you leave school<\/h2>\n<p>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.<\/p>\n<p>Let\u2019s say each year you\u2019re in college, you borrow up to the <a href=\"https:\/\/www.credible.com\/blog\/student-loans\/student-loan-limits\/\">maximum limit for federal direct unsubsidized student loans<\/a> for undergraduates. If you graduate in four years, you\u2019ll 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.<\/p>\n\n<table id=\"tablepress-158\" class=\"tablepress tablepress-id-158 table table-border-top table-rounded table-lg table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\">Year in school<\/th><th class=\"column-2\">Amount borrowed<\/th><th class=\"column-3\">Interest rate<\/th><th class=\"column-4\"><center>Months before capitalization<\/center><\/th><th class=\"column-5\">Capitalized interest<\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\">Freshman<\/td><td class=\"column-2\">$5,500<\/td><td class=\"column-3\">4.53%<\/td><td class=\"column-4\"><center>54<\/center><\/td><td class=\"column-5\">$1,121<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\">Sophomore<\/td><td class=\"column-2\">$6,500<\/td><td class=\"column-3\">4.53%<\/td><td class=\"column-4\"><center>42<\/center><\/td><td class=\"column-5\">$1,031<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\">Junior<\/td><td class=\"column-2\">$7,500<\/td><td class=\"column-3\">4.53%<\/td><td class=\"column-4\"><center>30<\/center><\/td><td class=\"column-5\">$849<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\">Senior<\/td><td class=\"column-2\">$7,500<\/td><td class=\"column-3\">4.53%<\/td><td class=\"column-4\"><center>18<\/center><\/td><td class=\"column-5\">$510<\/td>\n<\/tr>\n<tr class=\"row-6\">\n\t<td class=\"column-1\"><strong>Total<\/strong><\/td><td class=\"column-2\"><strong>$27,000<\/strong><\/td><td class=\"column-3\"><\/td><td class=\"column-4\"><\/td><td class=\"column-5\"><strong>$3,511<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Make partial payments in school.<\/b> In the example above, you could save close to $900 by paying the interest on your loans while you\u2019re 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.<\/div><\/div>\n<p><b>How much does capitalized interest increase your monthly payment and total repayment?<\/b><\/p>\n<ul>\n<li><b>If your loan balance had stayed at $27,000: <\/b>Your monthly payments on the standard 10-year repayment plan would have been about $280 a month, totalling $33,626.<\/li>\n<li><b>After interest capitalization: <\/b>The monthly payments on your $30,511 loan balance would be $317 a month for 10 years, a total of $37,998.<\/li>\n<\/ul>\n<p><b>That\u2019s a difference of $4,372<\/b>. This is a good example of why need-based <a href=\"https:\/\/www.credible.com\/blog\/student-loans\/must-borrow-college-start-subsidized-student-loans\/\">federal subsidized student loans<\/a> are such a good deal \u2014 you\u2019re not charged interest while you\u2019re in school, during your <a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/grace-period\/\">6-month grace period<\/a>, or if you\u2019re granted deferment.<\/p>\n<p><b><i>Student Loan Interest Rates: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/student-loan-interest-rates\/\"><b><i>Federal, Private, and Refinancing<\/i><\/b><\/a><\/p>\n<p><a name=\"when-you-are-granted-payment-relief\"><\/a><\/p>\n<h2>How interest capitalizes when you\u2019re granted payment relief<\/h2>\n<p>Unpaid interest may accrue when you\u2019ve been granted temporary <a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/deferment-forbearance-student-loans\/\">forbearance or deferment<\/a> of your loan payments. You may be granted forbearance or deferment if you lose your job or go back to school after you graduate.<\/p>\n<p>Let\u2019s 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\u2019re in law school, plus an additional six months while you take the bar exam and land a job.<\/p>\n<p><b>Cost to defer $30,511 in undergraduate loans at 4.53% interest: <\/b><\/p>\n\n<table id=\"tablepress-165\" class=\"tablepress tablepress-id-165 table table-border-top table-rounded table-lg table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\">Months in deferment<\/th><th class=\"column-2\">Unpaid interest<\/th><th class=\"column-3\">New loan balance (if capitalized)<\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\">6<\/td><td class=\"column-2\">$691<\/td><td class=\"column-3\">$31,202<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\">12<\/td><td class=\"column-2\">$1,382<\/td><td class=\"column-3\">$31,893<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\">24<\/td><td class=\"column-2\">$2,764<\/td><td class=\"column-3\">$33,275<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\">36<\/td><td class=\"column-2\">$4,146<\/td><td class=\"column-3\">$34,657<\/td>\n<\/tr>\n<tr class=\"row-6\">\n\t<td class=\"column-1\">42<\/td><td class=\"column-2\">$4,838<\/td><td class=\"column-3\">$35,349<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<p>If you defer payments for 42 months on $30,511 in loans that you\u2019re paying 4.53% interest on, you\u2019ll rack up another $4,838 in unpaid interest charges. When that interest is capitalized, your outstanding loan balance will grow to $35,349.<\/p>\n<p>This means the outstanding balance on the original $27,000 you borrowed to earn your bachelor\u2019s degree has now ballooned by $8,349, as unpaid interest was capitalized after you earned each of your degrees.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Avoid deferment or forbearance.<\/b> 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.<\/div><\/div>\n<p><b><i>Student Loan Deferment and Forbearance: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/deferment-forbearance-student-loans\/\"><b><i>Everything Borrowers Need to Know<\/i><\/b><\/a><\/p>\n<p><a name=\"when-you-leave-idr\"><\/a><\/p>\n<h2>How interest capitalizes when you leave income-driven repayment<\/h2>\n<p>Unpaid interest can also pile up when you\u2019re <a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/income-based-repayment\/\">enrolled in an income-driven repayment plan<\/a>. This happens if your monthly payments aren\u2019t big enough to cover the interest you owe.<\/p>\n<p>Unpaid interest that accrues in an IDR plan may be capitalized if you:<\/p>\n<ul>\n<li>Voluntarily leave the Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), or Income-Based Repayment (IBR) plans<\/li>\n<li>Fail to recertify your income each year you\u2019re enrolled<\/li>\n<li>No longer qualify for the PAYE or IBR plans based on your income<\/li>\n<\/ul>\n<h3>When unpaid interest is capitalized in an IDR plan<\/h3>\n<p>The unpaid interest that you rack up while you\u2019re enrolled in most IDR plans is not capitalized \u2014 added to your principal \u2014 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\u2019t get any bigger while you remain in the plan. The only exception is ICR, where unpaid interest is capitalized annually.<\/p>\n<p>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\u2019t have any unpaid interest added to your loan balance no matter how long you were in an IDR plan.<\/p>\n<p>But interest capitalization can be an issue for borrowers who have been enrolled in an IDR for an extended period of time \u2014 particularly if they have been paying back student loan debt that exceeds their annual income.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Review your payment history.<\/b> If you\u2019re 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.<\/div><\/div>\n    <script>\r\n        accordions_header_toggle = \"no\";\r\n        accordions_click_track = \"no\";\r\n        jQuery(document).ready(function($){\r\n            wizard_accordion  = $(\"#accordions-37659.accordions .items\").accordion({\r\n 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class=\"top-navs\">\r\n\r\n        \r\n\r\n<\/div>\r\n\r\n<script>\r\n    jQuery(document).ready(function($){\r\n        jQuery(document).on('keyup', '#search-input-37659 input.search-input', function(){\r\n            keyword = jQuery(this).val().toLowerCase();\r\n            content_head = [];\r\n            content_body = [];\r\n            $('#accordions-37659 .items  .accordions-head-title').each(function( index ) {\r\n                content = $( this ).text().toLowerCase();\r\n                content_head[index] = content;\r\n                $( this ).parent().removeClass(\"accordion-header-active\");\r\n                $( this ).parent().removeClass(\"ui-state-active\");\r\n            });\r\n            $('#accordions-37659 .items  .accordion-content').each(function( index ) {\r\n                $( this ).hide();\r\n                content = $( this ).text().toLowerCase();\r\n                content_body[index] = content + ' ' + content_head[index];\r\n                n = content_body[index].indexOf(keyword);\r\n                if(n<0){\r\n                    $( this ).prev().hide();\r\n                }else{\r\n                    $( this ).prev().show();\r\n                }\r\n            });\r\n        })\r\n    })\r\n<\/script>\t<div class=\"items\">\r\n\t    <div post_id=\"37659\" header_id=\"header-1554142499803\" id=\"header-1554142499803\" style=\"\" class=\"accordions-head head1554142499803\" toogle-text=\"\" main-text=\"&lt;h3&gt;Unpaid interest benefit: PAYE and IBR&lt;\/h3&gt;\" >\r\n        <div id=\"header-text-1554142499803\"    class=\"accordions-head-title\"><h3>Unpaid interest benefit: PAYE and IBR<\/h3><\/div>\r\n            <div class=\"accordion-icons right accordion-plus fa fas fa-chevron-down\"><\/div>\r\n        <div class=\"accordion-icons right accordion-minus fa fas fa-chevron-up\"><\/div>\r\n            <\/div><div class=\"accordion-content content1554142499803\">\r\n    <p>Most IDR plans have several features that limit the impacts of unpaid interest. For the first three years you\u2019re enrolled in PAYE and IBR, you\u2019re off the hook for unpaid interest on need-based federal direct subsidized loans.<\/p>\n<p>Whatever interest your monthly payment doesn\u2019t cover is waived. But keep in mind that for PAYE and IBR, the unpaid interest benefit only applies to need-based subsidized loans.<\/p>\n<\/div>    <div post_id=\"37659\" header_id=\"header-1558654640261\" id=\"header-1558654640261\" style=\"\" class=\"accordions-head head1558654640261\" toogle-text=\"\" main-text=\"&lt;h3&gt;Unpaid interest benefit: REPAYE&lt;\/h3&gt;\" >\r\n        <div id=\"header-text-1558654640261\"    class=\"accordions-head-title\"><h3>Unpaid interest benefit: REPAYE<\/h3><\/div>\r\n            <div class=\"accordion-icons right accordion-plus fa fas fa-chevron-down\"><\/div>\r\n        <div class=\"accordion-icons right accordion-minus fa fas fa-chevron-up\"><\/div>\r\n            <\/div><div class=\"accordion-content content1558654640261\">\r\n    <p>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.<\/p>\n<\/div>    <div post_id=\"37659\" header_id=\"header-1558654759856\" id=\"header-1558654759856\" style=\"\" class=\"accordions-head head1558654759856\" toogle-text=\"\" main-text=\"&lt;h3&gt;No unpaid interest benefit: ICR&lt;\/h3&gt;\" >\r\n        <div id=\"header-text-1558654759856\"    class=\"accordions-head-title\"><h3>No unpaid interest benefit: ICR<\/h3><\/div>\r\n            <div class=\"accordion-icons right accordion-plus fa fas fa-chevron-down\"><\/div>\r\n        <div class=\"accordion-icons right accordion-minus fa fas fa-chevron-up\"><\/div>\r\n            <\/div><div class=\"accordion-content content1558654759856\">\r\n    <p>The least generous (and least used) IDR plan, ICR, provides no interest benefit. If your monthly payment doesn&#8217;t cover all the interest on your loans, you&#8217;re still on the hook.<\/p>\n<\/div>\r\n\t<\/div>\r\n<\/div>\r\n\t\t\r\n<link rel=\"stylesheet\" type=\"text\/css\" media=\"all\" href=\"https:\/\/www.credible.com\/blog\/wp-content\/plugins\/accordions\/assets\/frontend\/css\/jquery-ui.css\"\/>\r\n<link rel=\"stylesheet\" type=\"text\/css\" media=\"all\" href=\"https:\/\/www.credible.com\/blog\/wp-content\/plugins\/accordions\/assets\/global\/css\/themes.style.css\"\/>\r\n<link rel=\"stylesheet\" type=\"text\/css\" media=\"all\" href=\"https:\/\/www.credible.com\/blog\/wp-content\/plugins\/accordions\/assets\/global\/css\/fontawesome.min.css\"\/>\r\n<link rel=\"stylesheet\" type=\"text\/css\" media=\"all\" href=\"https:\/\/www.credible.com\/blog\/wp-content\/plugins\/accordions\/assets\/global\/css\/animate.css\"\/>\n<p><a name=\"when-you-consolidate-your-loans\"><\/a><\/p>\n<h2>How interest capitalizes when you consolidate your loans<\/h2>\n<p>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.<\/p>\n<p>This is something to keep in mind if you\u2019ve 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\u2019t consolidated.<\/p>\n<p>The same can happen if you refinance federal student loans with a private lender. If you\u2019re enrolled in an IDR plan, and unpaid interest has been racking up because your monthly payments didn\u2019t cover the interest you owed, refinancing can trigger capitalization.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Check your accrued interest.<\/b> Before consolidating or refinancing federal student loans, ask your loan servicer for a payment history showing the amount of accrued interest on each loan.<\/div><\/div>\n<p><b><i>Learn More: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/private-vs-federal-student-loan-consolidation\/\"><b><i>Student Loan Consolidation vs. Student Loan Refinancing<\/i><\/b><\/a><\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><span style=\"font-size: x-large;\"><strong>Find out if refinancing is right for you<\/strong><\/span><\/p>\n<ul class=\"list--iconArrow accent--isGreen\">\n<li><strong>Compare actual rates, not ballpark estimates<\/strong> &#8211; Unlock rates from multiple lenders with no impact on your credit score<\/li>\n<li><strong>Won&#8217;t impact credit score<\/strong> &#8211; Checking rates on Credible takes about 2 minutes and won&#8217;t impact your credit score<\/li>\n<li><strong>Data privacy<\/strong> &#8211; We don&#8217;t sell your information, so you won&#8217;t get calls or emails from multiple lenders<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><a class=\"btn btn-warning\" href=\"https:\/\/www.credible.com\/refinance-student-loans\">See Your Refinancing Options<\/a><br \/>\n<small>Credible is 100% free!<\/small><\/p>\n<p><!-- TrustBox widget - Micro Combo --><\/p>\n<div class=\"trustpilot-widget\" data-locale=\"en-US\" data-template-id=\"5419b6ffb0d04a076446a9af\" data-businessunit-id=\"5536ec090000ff00057eebe7\" data-style-height=\"20px\" data-style-width=\"100%\" data-theme=\"light\"><a href=\"https:\/\/www.trustpilot.com\/review\/www.credible.com\" target=\"_blank\" rel=\"noopener noreferrer\">Trustpilot<\/a><\/div>\n<p><!-- End TrustBox widget --><\/p>\n<\/div><\/div>\n<h2>How to avoid capitalized interest<\/h2>\n<p>While it would be nice if you could avoid capitalized interest altogether, in many cases it\u2019s not possible.<\/p>\n<p>You\u2019re given the option of not making loan payments while you\u2019re in school because most of your time will be devoted to your studies. After you\u2019ve graduated, if you need a break in your payments, it\u2019s usually because you\u2019ve run into unexpected financial difficulties.<\/p>\n<p>But if your finances allow, here are three strategies for avoiding capitalization of unpaid interest:<\/p>\n<ol>\n<li><b>Make partial payments while in school:<\/b> If you can pay just the interest you owe, or some portion of it, that will reduce the amount of unpaid interest that\u2019s capitalized after you leave school.<\/li>\n<li><b>Avoid deferment or forbearance:<\/b> 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<\/li>\n<li><b style=\"font-size: 1.125em;\">Take care of unpaid interest before it&#8217;s capitalized:<\/b><span style=\"font-size: 1.125em;\"> If you\u2019re 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.<\/span><\/li>\n<\/ol>\n<p><b><i>See: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/pay-off-student-loans\/\"><b><i>11 Strategies for Paying Off Your Student Loans Faster<\/i><\/b><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Capitalized interest is unpaid interest that\u2019s 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&hellip; <a class=\"more \" href=\"https:\/\/www.credible.com\/blog\/refinance-student-loans\/capitalized-interest\/\">Continue reading<\/a><\/p>\n","protected":false},"author":9,"featured_media":37669,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"inline_featured_image":false,"footnotes":""},"categories":[2],"tags":[1501],"class_list":{"0":"post-37661","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","6":"hentry","7":"category-refinance-student-loans","8":"tag-student-loan-pay-off","9":"capitalized-interest","11":"post_tag-student-loan-pay-off"},"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What Is Capitalized Interest on Student Loans? - Credible<\/title>\n<meta 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