Student Loan Interest Capitalization
If you’re a student loan borrower and you’ve left school, your loan servicer may calculate your monthly payment to include the capitalized interest. This means that the amount of interest that accrues every day on your loans will be added to the principal balance each month. If this happens, it can increase your monthly payment and delay when you can start making progress on your principal balance. But there are ways to avoid capitalization—and even pay extra—to keep up with those payments and get them off your mind sooner than later!
What is interest capitalization?
Interest capitalization is the addition of accrued interest to your principal balance.
When you make a payment on your student loans, you may see a line in the payment summary that indicates “current principal balance” followed by a number that represents how much has been paid toward your total loan amount (the amount shown on your monthly statements). This figure is known as the current principal balance, or CPAB.
If you pay less than what is currently owed on your loan, then interest capitalization will occur. The amount of interest added to this new CPAB can be quite large depending on how long it has accrued since the last time you made a payment or received an infusion of funds into repayment plans like IBR or PAYE.
How will it affect you?
Defined as the increase of interest charges on a loan, capitalization occurs when you make your monthly payments less than what is required to cover the accrued interest. This can occur if you miss a payment or pay more than your regular monthly amount.
For example: You have $30,000 in student loan debt at 6% interest and are making payments of $50 per month. However, one month you fall behind on those payments and only send in $35 due to unforeseen circumstances. If this causes your payment amount for that month to be less than what was required for the interest that had accrued, then that portion of your outstanding balance will be added onto your principal balance with additional interest being charged on top of it!
When does interest capitalize?
When does interest capitalize?
Interest capitalization is not something that happens to you. It’s a term for when your monthly student loan payments increase because of interest accrual. This isn’t something that happens automatically; your lender can choose whether or not to capitalize your interest, and it may come down to the specific type of loan you have (like federal or private) or what kind of payment plan you’re on. Generally speaking, if one of these situations apply:
- You leave school and have an eligible loan balance* Your loans are in deferment, forbearance, forbearance with permissive default status*, or grace period
- You’re using an income-driven repayment plan (like Pay As You Earn [PAYE], Revised Pay As You Earn [REPAYE], Income-Based Repayment [IBR])
Can I pay ahead of schedule?
In short, yes. You can make extra payments at any time and they will go toward the remaining balance on your loan instead of capitalization. Additionally, even if you have a grace period remaining after making those payments (meaning you don’t have to pay interest during that period), they still qualify as an extra payment and will reduce the amount of capitalization that would otherwise occur when your grace period ends. This means it’s doubly beneficial to make these additional payments early: not only do they help save you money by reducing the overall cost of borrowing—and thus decreasing how much interest accrues in total over time—but they also ensure that there’s less to capitalize later on when your grace period expires and all outstanding interest becomes due at once!
Will the amount I pay each month increase?
If you have a student loan and the interest capitalization amount increases your monthly payment, then it’s possible that your overall debt will increase as well. This is because the new monthly payment will be applied to both principal and interest payments for the month.
If you have a student loan and your monthly payment increases, then it is possible that the total amount of interest paid over the life of that loan could also increase if you do not pay extra each month to reduce this additional amount.
Does paying extra reduce the amount that accrues daily?
The answer to this question is a resounding no. Any extra payments you make will go toward reducing your principal balance, so they won’t affect the amount that accrues daily.
Because of this, it’s important to keep paying your monthly minimums as scheduled. If you don’t pay enough on time each month or miss a payment altogether, the amount that accrues daily will increase significantly due to capitalization—and then your student loans could end up costing even more than expected!
Can I pay extra after a payment is due?
Yes. You can pay extra during the grace period, which is the time between when your payment is due and when it is considered late. This can help to reduce the amount of interest capitalized and reduce the amount of interest that accrues daily.
If you do not want to wait until after your grace period has ended to make payments, you can make one-time payments at any time during your repayment term (after your grace period). These payments will reduce any accrued interest that may have accumulated since your last payment was made.
What can I do if I think my loan servicer made an error?
You can contact your loan servicer to discuss any questions or concerns you have. If you are not satisfied with the response from your loan servicer, contact the regulatory agency that oversees your loan servicer. For example, if you have a federal Direct Loan, contact Federal Student Aid at 1-800-433-3243 or https://studentaid.ed.gov/sa/. If you have a private student loan, contact your lender directly for more information about its dispute resolution process.
If you still aren’t happy with how things were handled after working with the appropriate party, consider contacting the Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov/complaint or by phone at 1-855-411-2372 (TTY: 1-866-653-4261).
When you leave school, your loan servicer may calculate your monthly payment to include the capitalized interest.
If you leave school, your loan servicer may calculate your monthly payment to include the capitalized interest. This is a way to calculate interest that has accrued since your last payment, and it can often change from month to month. A common question people have about interest capitalization is whether it’s an extra fee or if it will increase their monthly payments. The answer? It’s not an extra fee and it will not increase your monthly payment. So what exactly is interest capitalization?
To understand how this works, let’s look at how student loans work in general:
When you take out a student loan, there are two key dates: the date when you first borrowed (when “principal” was paid) and the date when payments were first due (when “interest” was added). These dates control how much money has been paid toward principal versus how much interest has accumulated over time—and they help determine when each new payment applies those funds differently (e.g., pays off some of principal or adds more money toward paying down interest).
It’s important to understand how interest capitalization works and what you can do about it. If your loan servicer has made an error, contact them first and see if they can correct their mistake. If not, talk with a counselor at the National Consumer Law Center or other consumer advocacy group for help. You may also want to consider contacting an attorney or law firm that specializes in debt collection or student loans to find out if they can assist you as well.