How to avoid this
How to Use This Calculator
Enter your current loan balance and interest rate, then choose whether the loan is subsidized or unsubsidized. Pick the period you are in (grace, deferment, or forbearance) and how many months it lasts. If you already have unpaid interest sitting on the loan from before, add it in the optional field so it is included in the amount that capitalizes.
The calculator estimates how much interest accrues during the period, how much capitalizes onto your principal when repayment begins, and how that larger balance raises both your monthly payment and your total cost over the repayment term.
For a full repayment plan across all federal plans, use the student loan calculator. To see how the new payment fits the rest of your month, check the budget calculator, and to compare payoff strategies across several debts, use the debt payoff calculator.
What Is Interest Capitalization?
Capitalization is when unpaid interest gets added to your loan's principal balance. Once that happens, interest is charged on the new, larger balance, so you start paying interest on interest. The result is a higher monthly payment and more money paid over the life of the loan.
Capitalization usually happens at specific trigger points: when your grace period ends, when a deferment or forbearance ends, when you leave certain income-driven repayment plans, or when you consolidate. The grace period after leaving school is the most common one borrowers run into.
A Quick Example
Take a $30,000 unsubsidized loan at 6.5%. Over a six-month grace period it accrues about $975 in interest. If $500 of interest was already unpaid, then $1,475 capitalizes when repayment begins, and your balance becomes $31,475. You then pay interest on that whole amount for the entire repayment term, which is why a few hundred dollars of grace-period interest can cost more over time.
Subsidized vs Unsubsidized Loans
The loan type determines whether interest accrues in the first place.
- Subsidized loans: The federal government pays the interest while you are in school, during the grace period, and during qualifying deferment. Nothing accrues or capitalizes in those periods, so the grace period costs you nothing.
- Unsubsidized loans: Interest accrues from the day the loan is disbursed, including during school, grace, deferment, and forbearance. That interest capitalizes when repayment begins.
One important exception: even subsidized loans accrue interest during forbearance. Forbearance is the costliest pause because interest builds on every loan and then capitalizes. Deferment is usually better than forbearance when you qualify, and income-driven repayment is often better than either for long-term affordability.
How to Avoid or Reduce Capitalization
- Make interest-only payments during your grace period, deferment, or forbearance. Paying interest as it accrues keeps it from capitalizing.
- Pay off any existing unpaid interest before a capitalization trigger, such as the end of your grace period.
- If you have unsubsidized loans, even small payments while still in school reduce how much capitalizes later.
- Choose deferment over forbearance when you qualify, since subsidized loans do not accrue interest in deferment.
- Avoid unnecessary forbearance. An income-driven repayment plan can lower payments without the same capitalization risk.
Frequently Asked Questions
What is student loan interest capitalization?
It is when unpaid interest is added to your principal. After it capitalizes, you pay interest on a bigger balance, which raises your monthly payment and total cost. It typically happens when a grace period, deferment, or forbearance ends.
Does interest accrue during the grace period?
On unsubsidized loans, yes, the entire time. On subsidized loans, no, because the government covers the interest during the grace period and qualifying deferment. Both loan types accrue interest during forbearance.
How do I stop my interest from capitalizing?
Make interest-only payments during the period so the interest never gets added to your principal. Even paying part of it reduces how much capitalizes.
How is grace period interest calculated?
Federal loans use simple daily interest on the principal. The interest accrued is roughly the principal times the annual rate times the fraction of the year in the period. A $30,000 loan at 6.5% accrues about $975 over six months.
Is capitalized interest tax deductible?
Capitalized interest that you later pay off may count toward the student loan interest deduction, subject to income limits and annual caps. Confirm your situation with a tax professional or current IRS guidance.