Quick overview

Interest capitalization turns previously unpaid interest into part of your principal balance. That change causes future interest to be calculated on a higher amount, which increases the total interest you pay and usually raises monthly payments. Federal and private loans follow different rules; always confirm timing with your loan servicer (U.S. Dept. of Education — studentaid.gov).

How capitalization works

  • During periods when payments are paused (forbearance, deferment) or when interest isn’t paid, interest continues to accrue unless a program specifically prevents it. For example, subsidized federal loans do not accrue interest during subsidized deferment; unsubsidized loans do. (Source: studentaid.gov)
  • At a capitalization trigger, the servicer adds accrued interest to your outstanding principal. From that point forward, interest accrues on the new, larger principal.

Common capitalization events

  • End of grace period when accrued interest was unpaid
  • End of deferment or forbearance (federal or private)
  • Consolidation or refinancing (capitalization may occur at payoff)
  • Recalculation after changing repayment plans or missing payments
  • After loan rehabilitation or certain default resolutions

For a deeper look at deferment vs. forbearance, see FinHelp’s guide on Student Loan Forbearance vs Deferment: Practical Differences. Also review How Interest Capitalization Works During Forbearance and Deferment Periods for examples and timelines.

Simple numeric example

  • Principal: $20,000
  • Accrued unpaid interest during deferment: $600
    After capitalization the new principal is $20,600. On a 10-year repayment at 5% APR, monthly payment rises roughly from $212 to about $218 — an increase of about $6 per month. Over the loan life, that extra principal generates more interest and raises total cost.

Who is most affected

  • Borrowers with unsubsidized federal loans or private loans (interest accrues during pauses)
  • People who use extended forbearance repeatedly
  • Graduates who delay payments and don’t cover accruing interest

Strategies to lower the impact

  • Pay interest as it accrues during deferment/forbearance when possible — even small payments prevent capitalization.
  • Enroll in an income-driven repayment (IDR) plan to lower monthly payments and reduce the chance of capitalization causing unaffordable payments; see FinHelp’s Income-Driven Repayment Plans: Choosing the Best One for You.
  • Consolidate thoughtfully: consolidation can capitalize interest but may lower your monthly payment by extending terms — compare long-term cost vs. short-term relief.
  • Negotiate with your servicer for partial-interest payments or alternative schedules.

In my practice I’ve seen clients cut total interest by making small interest-only payments during short deferments — that simple habit often avoids capitalization and reduces stress when repayment resumes.

What to check with your loan servicer

  • Ask when accrued interest will capitalize and whether it will change your monthly amount immediately.
  • Request an amortization schedule showing the effect of capitalization.
  • Confirm whether any temporary federal programs (for example emergency pauses) affect accrual or capitalization timing. For federal rules, consult studentaid.gov and the Consumer Financial Protection Bureau for borrower protection details.

Sources and further reading

Disclaimer: This content is educational and not individualized financial advice. Rules differ by loan type and servicer; consult your loan servicer or a licensed financial advisor for guidance tailored to your situation.