Whether your student loans are federal or private, you are being charged interest on the money that you borrowed.
However, you might be wondering when does interest actually start being charged? What happens to that interest if you don’t pay it? How can you prevent capitalized interest from getting out of control and derailing your debt payments?
Let’s dive into the nitty-gritty and find out.
What is capitalized interest?
According to Sallie Mae, the interest on your student loan starts on the first day your lender sends funds from your loan to either you or your school.
Interest on your loan grows daily, and you will continue to pay interest on your loan until it is paid off. Your loan’s interest rate is listed in your Disclosure Documents and billing statement.
“Capitalized” means added to the Current Principal or balance on the loan that you still owe. Your interest is no longer in a separate category as your loan principal.
Since interest has been building since the start of the loan, your billing statement might show a balance that’s larger than the original amount you borrowed.
Once interest is capitalized, your student loan servicer will begin charging you interest on that amount as well. This can significantly increase the amount of your monthly payment and add years to your repayment term.
Paying interest on subsidized loans
When a loan is subsidized, another entity (not you) is paying the interest during certain qualifying periods. Federal direct subsidized loans are the most common ones under this category. With these loans, the federal government pays your interest during the following circumstances:
- while you’re enrolled in school at least half-time
- for the first six months after you leave school (this is referred to as a grace period)
- during a period of deferment (a postponement of loan payments during certain qualifying periods)
These perks, along with others typically available for federal loans like income-driven repayment plans, make federal direct subsidized loans the most desirable if you have to borrow money to fund your education.
However, because these loans are only awarded to undergraduates on the basis of financial need, not everyone qualifies for them.
Even if you have federal direct subsidized loans, keep in mind that interest may build during periods of forbearance when you are not required to make payments. This interest can become capitalized interest and added to your loan balance, which you’ll have to eventually pay.
Paying interest on unsubsidized loans
When a loan is unsubsidized, interest begins accruing as soon as the money is available to you. This means that you are responsible for paying the capitalized interest on your loan regardless of the circumstances.
Federal direct unsubsidized loans are the most common form of these. While unsubsidized loans are not as desirable as subsidized loans, the federal government makes these loans available to graduate students and undergraduate students alike regardless of financial need.
Additionally, federal direct unsubsidized loans are still eligible for income-based repayment, Public Service Loan Forgiveness, other forgiveness programs, as well as deferment and forbearance.
If your unsubsidized loan is federal, you may not be required to make payments while you are in school at least half of the time, or during your grace periods and periods of deferment or forbearance.
However, the “clock” on your interest is always running on federal direct unsubsidized loans, and can become capitalized interest when added to your current principal.
Paying interest on private loans
Private student loans are almost always unsubsidized. As with federal direct unsubsidized loans, interest begins accruing from the time of disbursement. You are responsible for paying interest during all periods.
Like federal direct unsubsidized loans, private student loans are available to all students regardless of financial need. However, private student loans almost always come without the repayment and forgiveness perks that federal loans are eligible for
With private loans, you may or may not have to make payments while in school, there may or may not be a grace period, and deferment or forbearance is typically not an option. But remember, the “clock” is always running on interest for private loans.
How to avoid capitalized interest
Regardless of the type of loan you have, if you have accrued interest by the time that you are required to begin making payments you have three options if you want to avoid capitalized interest.
The first option is to pay the accrued interest in full when you start making payments after the grace period, deferment period, or forbearance period ends for your loan. This can be difficult to achieve depending on your income, the overall loan amount, and the amount of interest you need to pay off.
The second option is to make payments toward your interest as soon as your loans are disbursed. This option can be challenging because it means making payments while you’re still a student. You’ll have to track down your student loan servicer and keep track of how much interest is accruing on your loan.
Depending on your financial circumstances as a student, it may be hard for you to budget student loan payments when you’re living lean and not making much of an income.
However, despite the difficulties associated with making payments while in school, it may be worth the effort because it can prevent your student loan balance from inadvertently ballooning out of control.
Your third option is to optimize your borrowing by maximizing any subsidized loans for which you are eligible before pursuing other options, and borrowing as little as possible in the first place.
Essentially, the more frequently interest is added to the Current Principal, the more interest you will pay. Capitalized interest can become a huge financial burden if left unchecked.
Be sure to have a plan in place for how you want to handle paying the interest on your student loans before your separation period, grace period, forbearance period or deferment period ends.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.49% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.48% effective April 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.49% – 7.27%1||Undergrad & Graduate|
|2.49% – 6.65%3||Undergrad & Graduate|
|2.49% – 7.41%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.49% – 7.11%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|