Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Unpaid interest that capitalizes gets added directly to the principal balance, and from that point forward, interest is charged on the new, larger balance, including on the interest that just got folded in, which is a meaningfully different, more expensive situation than interest simply continuing to accrue on the original principal alone.
Before you rely on it
What to check
Check whether your specific loan servicer's terms capitalize interest at forbearance or deferment end, and if so, consider paying at least the accruing interest during that period to avoid the balance growing further.
The common error
Where people go wrong with student loan interest capitalization calculator
Treating capitalized interest as if it accrued the same way as regular unpaid interest. Once it's added to principal, future interest is calculated on that larger amount, compounding the original unpaid interest going forward.
Sensitivity evidence
How annual interest rate changes the balance after capitalization
| Annual interest rate | Balance after capitalization | Interest capitalized |
|---|---|---|
| 4.0% | $30,900 | $900 |
| 5.0% | $31,125 | $1,125 |
| 6.0%worked example | $31,350 | $1,350 |
| 7.0% | $31,575 | $1,575 |
| 8.0% | $31,800 | $1,800 |
Every input, tested
Which input moves the balance after capitalization most
| Input | Tested from | To | Balance after capitalization at each end | Swing |
|---|---|---|---|---|
| Loan principal | $27,000 | $33,000 | $28,215 to $34,485 | $6,270 (20%) |
| Months of deferral | 7.0 months | 11.0 months | $31,050 to $31,650 | $600 (1.9%) |
| Annual interest rate | 5.0% | 7.0% | $31,125 to $31,575 | $450 (1.4%) |
Two variables at once
Balance after capitalization by annual interest rate and loan principal
| Annual interest rate \ Loan principal | $24,000 | $30,000 | $36,000 |
|---|---|---|---|
| 4.0% | $24,720 | $30,900 | $37,080 |
| 5.0% | $24,900 | $31,125 | $37,350 |
| 6.0% | $25,080 | $31,350 | $37,620 |
| 7.0% | $25,260 | $31,575 | $37,890 |
| 8.0% | $25,440 | $31,800 | $38,160 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Loan principal | $30,000 |
| Annual interest rate | 6.0% |
| Months of deferral | 9.0 months |
| Balance after capitalization | $31,350 |
| Interest capitalized | $1,350 |
Where the inputs come from
Loan principal is the original balance, the annual interest rate is the loan's rate, and months of deferral is how long interest accrued without payments, such as during a deferment, forbearance or grace period. Capitalization adds unpaid interest to the principal, so future interest is charged on the larger amount. Check your servicer's statement for accrued interest, and confirm whether your loan is subsidized, in which case the government pays interest during deferment.
When the result stops applying
The rules for when capitalization occurs have changed: federal Direct Loans now capitalize only in limited circumstances, while private loans commonly capitalize at the end of grace periods and deferments. The calculation uses simple interest for the period and one capitalization event. Subsidized loans do not accrue interest during in-school and some deferment periods.
What to compare it with
See the payment effect with the student loan payment calculator, and payoff time on the student loan payoff page. The income-driven repayment and PSLF calculators cover federal plans, and the loan interest calculators show how compounding works in general. Check your loan type and the servicer's policy before choosing a deferment.
People also ask
Frequently asked questions
What is interest capitalization?
Adding unpaid interest to the loan principal, so that future interest is calculated on a larger balance, which increases the cost of the loan.
How can I avoid capitalization?
Pay the interest as it accrues during grace periods, deferment and forbearance, or choose a repayment plan that keeps payments at least equal to the interest.
Do federal loans still capitalize interest?
Only in limited situations under current federal rules, while many private lenders capitalize at the end of grace periods and deferments.