Private Student Loans - Understanding Interest Capitalization

Interest capitalization occurs any time accrued and unpaid interest and loan fees are added to the outstanding principal balance of a loan. The more frequently a lender adds the interest to the principal loan balance, the more interest a borrower will pay.

Depending on the terms of your loan, capitalization may occur throughout repayment or as result of the following:

• once, prior to repayment;
• after periods of deferment and/or forbearance;
• on a regular schedule, such as annually.

More Capitalization = More Expense

The more the loan capitalizes the more expensive the loan will be. For example, if private student loan payments are deferred while a student is in school, the interest that has accrued during the deferment period will be added to the loan principal – capitalized – when the loan goes into repayment. This will make the total amount owed larger.

The chart below illustrates the difference between paying interest while in school and accruing the interest and having it capitalize once at repayment. The figures are based on a $10,000 loan.

Capitalization Example
Paying Interest while in School		Capitalizing Interest - Full Deferment
Your Loan Funds Disbursed:	$10,000.00	Your Loan Funds Disbursed:	$10,000.00
Total Amount Financed:	$10,000.00	Total Amount Financed:	$10,000.00
Your Grace Period in:	6 months	Your Grace Period in:	6 months
Your Full Deferment (including grace) Period:	59 months	Your Full Deferment (including grace) Period:	59 months
Your Interest Only Payments:	$66.67	Your Interest-Only Payment	$0
Your Total Interest During Deferment:	$3,933.33	Your Total Capitalized Interest	$3,933.33
Your Total Repayment Amount:	$10,000.00	Your Total Repayment Amount	$13,933.33
Your Monthly Payment:	$121.33	Your Monthly Payments	$169.05
Your Total Interest Cost (after repayment begins):	$4,559.31	Your Total Interest Cost (after...)	$6,352.64
Total Cost of Loan:	$14,559.31	Total Cost of Loan:	$20,285.37

Estimate Interest Capitalization Cost

Learn more about the effect of interest capitalization on your total borrowing costs by inserting loan figures into the HESC interest capitalization calculator. Switch the loan amount, your election to pay interest while in school and the period of the loan; the results are revealing.