What is capitalized interest?

To begin let’s first delineate the difference between a subsidized and unsubsidized loan. If you received a subsidized loan for school NO interest will accrue while you are in school, sweet! If however you have an unsubsidized loan than you are not so lucky. Granted you could elect to make interest only payments if you so choose while in school, but if you don’t that interest will later be added onto your principal amount, and overall will increase your debt. Let’s take a look how.

So what is capitalized interest exactly? When the interest is not paid during college, it is accrued and added to the principle balance. Capitalization occurs the day the deferment period is over and the interest accrued over the loan period is added to the original amount of the loan. This additional amount subsequently accrues interest, adding an additional expense to the loan.

Here is an example.

Loan amount: $6,000.

Interest per month: $20

Loan balance after 1 year: $6,240

Loan principal upon capitalization (let’s say after 2.5 years): $6,600

Then that $6,600 loan balance is used as the new benchmark instead of $6,000. Now the monthly interest may go up to $21.78.

This was just a very basic visual used to demonstrate the capitalization concept. Actual balances and interest rate calculations may vary.

Confused about any other terms. Check out the Student Loan Network Glossary.

Also, find more information on the Difference Between Subsidized and Unsubsidized Loans.

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