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What Is Capitalized Interest on Student Loans?
Capitalized interest is unpaid interest that's added to your student loan, increasing the total you repay.
Anna Helhoski is a senior writer covering economic news and trends in consumer finance at NerdWallet. She is also an authority on student loans. She joined NerdWallet in 2014. Her work has appeared in The Associated Press, The New York Times, The Washington Post and USA Today. She previously covered local news in the New York metro area for the Daily Voice and New York state politics for The Legislative Gazette. She holds a bachelor's degree in journalism from Purchase College, State University of New York.
Des Toups Lead Assigning Editor | Student loans, repaying college debt, paying for college
Des Toups was a lead assigning editor who supported the student loans and auto loans teams. He had decades of experience in personal finance journalism, exploring everything from car insurance to bankruptcy to couponing to side hustles.
Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
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Capitalized interest on student loans increases the total amount you have to pay back. It’s unpaid interest that typically gets added to your student loan balance after periods when you don’t make payments — such as during deferment or forbearance.
This interest is something to avoid; otherwise, you’ll repay much more than you originally borrowed.
Say you borrow $5,000 each year you’re in school at an interest rate of 5% each year. Over four years of school and a six-month grace period, $2,937 in interest accrues. At repayment, that interest amount will capitalize — get added to your balance — and you’ll owe $22,937.
Going forward, you’ll pay interest on top of that capitalized interest — an extra $31 a month, in this case.
But you can avoid this by paying off the interest before it capitalizes. If you pay the $2,937 in interest before it’s added to your balance, you would owe $20,000. By avoiding capitalization, you would save $802 over the life of the loan, making it easier to pay off your student loans sooner.
How to avoid capitalized interest on student loans
You can avoid capitalized interest on student loans in the following ways:
Make interest payments monthly while you're in school. Payingthe intereston unsubsidized loans during an in-school deferment will help you avoid capitalization costs, as will avoiding deferment or forbearance altogether. If you have a private loan, opt for a repayment plan that starts with making interest-only payments in school.
Pay off interest before it's added to your balance. By knowing what causes capitalization, you can prevent these costs. For example, make monthly payments during your grace period to eliminate interest before repayment begins. Or pay off interest in a lump sum if you know you'll no longer qualify for an income-driven plan. Payment must happen before your loan's status changes. Contact your student loan lender or servicer to make payments.
Preventing interest from capitalizing can save you hundreds or thousands of dollars.
“Preventing interest from capitalizing can save you hundreds or thousands of dollars.”
For example, say you’re an undergraduate dependent student who borrowed the maximum amount of unsubsidized federal student loans each year from 2014 to 2018. You would owe $27,000, plus $3,276 in capitalized interest. If you paid off accrued interest before it capitalized, your monthly payment would be over $30 lower and you would save $754 over the life of the loan.
Pay off interest during grace period
Don’t pay off any interest; let interest capitalize
Total owed when grace period ends
$27,000
$30,106.80
Monthly payment
$274.44
$306.02
Use a student loan calculator to find out how much your student loan bill would be if you let interest capitalize.
Key terms in this story
Capitalization: A process that adds unpaid interest to the principal balance of your loan, increasing the amount on which you pay interest going forward. Capitalization generally happens after periods of authorized nonpayment, like deferment and the grace period. You can avoid capitalization by paying at least the interest on your loan each month.
Grace period: A period of authorized nonpayment that generally lasts six months after you’ve graduated, left school or dropped below half-time enrollment. All federal student loans qualify for a grace period, but private lenders may not offer them. You can make payments during the grace period to start paying down the loan and to avoid interest capitalization.
Private student loan: Education funding from banks, credit unions and online lenders instead of the federal government. Private loans are best used to fill funding gaps after maxing out federal loans.
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