How does interest capitalization work?

Interest capitalization refers to the process by which unpaid interest is added to the principal balance of a loan or a student loan. This can increase the total amount owed over time, resulting in borrowers paying interest on previously accrued interest. For students with federal student loans, interest capitalization can occur during specific circumstances, such as when a borrower enters repayment after a grace period, defaults on a loan, or completes a deferment or forbearance period. During a deferment or forbearance, borrowers may not be required to make payments, and interest can accrue. If this interest is not paid while the borrower is not making payments, it is added to the principal balance when the borrower resumes payments. This new principal amount will then accrue interest, increasing the total cost of the loan over time. Borrowers should be aware of the impact of interest capitalization as it can significantly affect the overall loan repayment amount. Managing interest effectively can help reduce the total financial burden. To find more detailed information or specific scenarios related to interest capitalization, individuals may want to explore the Simple Tuition website for additional resources and guidance.