By Ryan Laspina
Senior Specialist, Red Flags and External Reviews at APUS
Do you know what interest capitalization is? If you haven’t taken an accounting class yet, you may not be aware that interest can capitalize on your unsubsidized student loans. Capitalization occurs when your lender adds accrued interest onto the principal amount of your student loan.
Capitalization is a vicious cycle. Once interest is capitalized, it becomes a part of the principal loan amount, which in turn accrues more interest.
Even if you are not currently making loan payments, you accrue interest on your unsubsidized student loans. For example, while you are in school, your loans may be deferred but still accrue interest. However, you have to hit specific triggers to have all of that interest start to capitalize:
- Have your loans enter into repayment
- End your forbearance or deferment
- Default on your loan
- Change your repayment plan
- Consolidate your loans
While these events trigger loan capitalization, that doesn’t always mean that your student loan payments will skyrocket. It depends upon your loan repayment plan. For standard or graduated repayment plans, the interest capitalization remains small as long as you make full, timely payments each month.
Interest capitalization hurts you if you do not pay full, timely payments or if you enter into income-driven repayment plans. Your monthly payments may be lower, but you’ll make more payments than you would on other plans due to the interest capitalization.
The best way to combat loan interest capitalization is to enter into a standard or graduated repayment program and make full, timely payments each month. Sometimes paying loans back in full right away is not realistic, but making every effort to pay loans back in full saves you money in the long run.
Interest capitalization really adds up, so be aware that it can be financially damaging to you. If you’re having trouble making your payments, talk with your financial aid specialist or loan servicer about potential solutions.