Interest capitalization is a concept that can significantly affect your student loan balance. In simple terms, interest capitalization is when unpaid interest is added to the principal balance of your loan.
Understanding when interest capitalization occurs and how it affects your loan balance and interest payments is essential to effectively managing your student loan debt.
When interest capitalization occurs
Student loan interest capitalization typically occurs in specific situations, such as the end of a grace period for unsubsidized loans, entering repayment after deferment or forbearance, switching repayment plans, or consolidating loans.
To learn more about interest capitalization and when it occurs, refer to our in-depth article on [Interest Capitalization Student Loans](Link to the article).
How capitalization affects loan balance and interest payments
When interest capitalization happens, it increases your loan balance, and future interest is calculated on this new, higher balance. This process can substantially affect the total interest you pay over the life of your loan. For more information on how interest capitalization impacts your student loans, read our article on [When Student Loan Interest Compounds](Link to the article).
Strategies to reduce the impact of capitalization
As part of President Biden’s efforts to ease the burden on borrowers, the current student loan payment pause and 0% interest rate freeze until December 31, 2022, is in effect due to the 2020 CARES Act.
This temporary measure helps prevent interest capitalization for the time being and provides relief to borrowers struggling financially.
But it’s essential to plan for the eventual resumption of interest accrual and make informed decisions about managing your student loans.
Related: What Increases Your Student Loan Balance?