Capitalization
What Is Capitalization?
Capitalization is the process of adding unpaid interest to the principal balance of a loan.
Once interest is capitalized, future interest is calculated on the new, higher balance.
This increases the total cost of the loan over time.
Capitalization commonly occurs in student loans and during periods of deferment or forbearance.
Why Capitalization Matters
When interest is capitalized:
- Your principal increases
- Future interest grows
- Total repayment cost rises
For example:
- Original balance: $20,000
- Accrued unpaid interest: $2,000
- New principal after capitalization: $22,000
Interest now accrues on $22,000.
Federal student loan capitalization policies are overseen by agencies such as U.S. Department of Education.
How Capitalization Happens
Common triggers include:
- End of deferment
- End of grace period
- Leaving income-driven repayment
Not all loans capitalize interest the same way.
FAQs About Capitalization
Does capitalization happen automatically?
Often, yes, depending on loan terms.
Can I prevent capitalization?
Pay accrued interest before it’s added.
Does capitalization affect credit score?
Indirectly, through higher balances.
Related Terms
