Student Loan Interest Capitalization Calculator

How is capitalized interest calculated?

Capitalization is the addition of unpaid interest to the principal balance of your student loan. When interest capitalizes, your principal balance increases, and future interest is then charged on that higher principal amount.

New Principal = Current Principal + (Daily Interest Rate × Days × Period) - Payments

Capitalization Example: In-School Deferment

Imagine a student has a $20,000 loan at a 6% annual interest rate. If the loan is deferred for 12 months while the student is in school and no payments are made, interest continues to accrue behind the scenes.

Step-by-step calculation:

1. Calculate monthly interest: $20,000 × 0.06 / 12 = $100/mo
2. Total interest accrued over 12 months: $1,200
3. Add accrued interest to principal: $20,000 + $1,200 = $21,200
4. Calculate new monthly payment based on the higher $21,200 balance over the remaining term

Frequently Asked Questions

When does capitalization happen?
Capitalization occurs after specific trigger events, most commonly when a grace period ends after graduation, or when a period of deferment or forbearance concludes.

How can I avoid capitalization?
You can avoid capitalization by making interest-only payments while you are in school or during periods of deferment. This prevents interest from being added to your principal balance.

Does capitalization affect subsidized loans?
Direct Subsidized Loans generally do not accrue interest that capitalizes while you are in school or during deferment because the government subsidizes (pays) the interest during those periods.