Federal student loan interest capitalization | 12.11.08

It took me forever and a day to find the answer to the question of when interest is capitalized on a federal student loan like the Stafford loan.

Capitalization occurs when:

  • The loan enters repayment
  • The loan exits deferment
  • The loan exits forbearance
  • The loan exits any status in which interest accrues

For the average student, interest will capitalize when the grace period ends on a subsidized Stafford loan. If you put a subsidized or unsubsidized Stafford loan into deferment or forbearance, once you return to repayment, accrued interest will capitalize. (see: College Loan Rates)

If you’re not familiar with capitalization, read What is capitalized interest?


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10 Responses to “Federal student loan interest capitalization”

  1. Syntetic Darkness says on May 10, 2012 at 4:34 pm:

    Citibank recently sold my student loans to Sallie Mae (more than a year after they entered repayment. All of my loans were in good standing. Sallie Mae on aquiring my loans recapitalized the interest. I do not think they have the right to do that but am not sure if I am mistaken, everything I have seen does not say that intrest can be capitalized when a loan is sold. Has anyone else experienced this and solved the problem? Please let me know

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  2. Robert Stephens says on October 12, 2010 at 2:05 pm:

    Is it possible, then, to have payments made while in school NOT go to interest? (So that the original loan is not accruing as much interest, because the accrued interest is not accruing more interest, if that makes sense.)

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    • Student Loan Guru says on October 15, 2010 at 8:15 am:

      That's a good question.

      I would contact the Direct Loan Center to get an accurate answer, as payments while a loan is deferred are tricky to call. Their number is (800) 848-0979.

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      • Robert Stephens says on October 18, 2010 at 10:14 am:

        I did some additional poking around on the Direct Loan website and, unfortunately, they clearly indicate that both electronic and paper payments will be applied first to late fees, second to accrued interest, and third to the principle. Still, it makes sense (IF you are going to begin paying the loan back before you have to), to not make any payments until you have at least enough to cover all of the accrued interest you owe (stick the money in a high-yield checking account or something until you have enough saved to pay off all of the accrued interest and some principle).

      • Kati says on December 17, 2011 at 11:35 am:

        If you pay your scheduled amount each month (exactly on time) and on the SAME day or the day following make an extra payment, the extra payment will go toward principle. This assumes you are making online payments.

        If you pay by check, you must note on the check that you want the payment to principle only.

        I was mamking extra payments each month added to my scheduled payments thinking this would help pay down the principle. When I had extra money I would simply make an additional payment at different times each month. The loan company first took the monthly interest that had accrued for any days that month after my payment date, and THEN applied the rest to principle. The total amount of the extra payment was never applied to principle. I was shocked! This was an expensive lesson and the company (ACS) has reported to several regulatory agencies as deceptive. Nowhere on their website does it mention “pre-payment” and how it is applied. I was told I had to fax a request to receive the information in writing.

        Good luck.

    • Casey Gaddis says on February 11, 2011 at 1:58 pm:

      Yes, but as Robert said, you need to pay all late fees (if applicable) and/or interest first. So, if you have $5 in late fees, $25 in interest, and you pay out $50, it pays off the late fee and interest and then pays off $20 of the principal loan amount. When I kept up with my interest, I would purposely pay an extra $50-$100 to make a small dent in my principal loan amount.

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  3. Sue says on September 28, 2010 at 4:24 pm:

    I am looking at my loans . After Capitalization Citibank added back in again allthe Late fees. I had already paid. Is this correct or an error?

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  4. Rudy Gawron says on October 21, 2009 at 3:32 pm:

    So, Capitalization occurs on the first day after the 6-month grace period expires; that is the day the loan Enters Repayment. Is this 100% correct? This applies to BOTH subsidized & unsubsidized loans, correct?

    This answer is VERY important to me. Please be sure.
    Thank you.

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