Student Loan Interest Capitalization Calculator
Example: Original principal: 30000 $ · Interest rate (APR): 6.5 % · Months of deferment / grace: 12 months · Repayment term: 120 months
| New balance after capitalization | $31,950 |
| Interest added to principal | $1,950 |
| New monthly payment | $363 |
| Extra lifetime cost | $4,607 |
Worked example
A $30,000 loan at 6.5% deferred for 12 months accrues about $1,950 of interest. Capitalized, the balance becomes $31,950. Repaid over 120 months, the payment rises from about $341 to $363, and the loan ends up costing roughly $2,700 more in total than if you had paid the interest before it capitalized — the price of letting interest compound on interest.
Frequently asked questions
What is interest capitalization?
It is when unpaid, accrued interest is added to your loan's principal balance, usually after deferment, forbearance, a grace period, or leaving certain repayment plans. Afterward you are charged interest on the larger balance, so you effectively pay interest on interest.
How can I avoid it?
Pay at least the interest as it accrues, even during school or deferment, so there is nothing to capitalize. Even small interest-only payments while in school can save hundreds or thousands over the life of the loan by keeping the principal from ballooning.
Do all loans capitalize interest?
Subsidized federal loans do not accrue interest while you are in school, so there is nothing to capitalize then. Unsubsidized federal and private loans do accrue interest that can capitalize. Check each loan's terms and enter the deferment period that applies.
Is capitalized interest tax-deductible?
The student loan interest deduction generally applies to interest you actually pay, subject to income limits. Capitalized interest becomes principal, and interest later paid on it may qualify. Consult IRS Publication 970 or a tax professional for your situation.