Student loans · Capitalization
Student loan capitalization calculator.
Enter your principal, rate and the unpaid interest about to capitalize. See the new balance, the new daily interest and what it costs over the term.
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The short answer
Capitalization adds unpaid interest to your principal, and from then on you pay interest on the larger balance. Federal Student Aid’s own example: a $10,000 unsubsidized loan at 6.8% accrues $1.86 a day; after $340 of unpaid interest capitalizes, the principal is $10,340 and interest rises to $1.93 a day. Over 10 years that lifts the payment from $115.08 to $118.99 and adds $129.53 of interest on the $340.
When it happens. Federal Student Aid says unpaid interest on Direct Loans capitalizes after a deferment on an unsubsidized loan, or if you are repaying under IBR and no longer qualify to make payments based on income or leave the plan. 34 CFR 685.202(b) states the Secretary may add unpaid accrued interest to principal and capitalizes it on expiry of a deferment for a loan not eligible for interest subsidy.
How the extra cost is figured. Payment after minus payment before, times the number of months, minus the unpaid interest itself. That leaves only the interest charged on the capitalized amount. It assumes a fixed rate and a fixed term, which is not how every income-driven plan works.
Frequently asked questions
What does it mean when student loan interest capitalizes?
Unpaid interest is added to your principal balance. Your interest is then recalculated on the higher balance.
Does capitalization raise my monthly payment?
It can. Federal Student Aid says that depending on your repayment plan, capitalization may increase your monthly payment. On a fixed 10-year plan the payment rises with the balance, as shown here.
Can I avoid capitalization?
Paying the interest as it accrues, even during a period when payments are not required, keeps it from building up. This tool shows what is at stake.
Is the extra cost the same on every plan?
No. This page assumes a fixed rate and term. Income-driven plans can treat unpaid interest differently, so check 34 CFR 685.209(h) and your servicer.
Sources
Checked
- Federal Student Aid: Federal Interest Rates and Fees
- eCFR: 34 CFR 685.202, Charges for which Direct Loan Program borrowers are responsible
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Estimate only
Estimate from a fixed-rate, fixed-term model. Your servicer’s figures govern.