I remember the first time I ran into capitalized interest. I was your typically lazy student who never questioned anything. In fact I was even on top of things by most standards as every couple of months I went online and made a payment towards my smallest loan to work at paying it off.
Then one day I went on and realized the totals on many of my loans had grown significantly, yet I was not sure why. However I did not question it continued paying my loans and moved on (now me could kick then me for being so lackadaisical).
If I had bothered to call my servicer they would have informed me what had happened was my interest capitalized. Interest capitalizes after a forbearance, deferment or grace period. Also if you exit the partial financial hardship portion in many cases of an Income-Driven plan, that can cause capitalization.
Had I had a great loan rep, they would have explained to me what a big deal it was. A quick example. So lets say you had a $10,000 dollar loan with a 6.0% interest rate. This is a $1.64 daily interest (remember daily interest is figured by multiply balance by interest rate divided by 365).
Now you have had this loan for almost 3 years (lets say 1000 days to make the math easy) so $1,640 dollars in interest has accrued. You make no payments towards it and this interest capitalizes. What does this affect?
This raises your principal on the loan to $11,640 and your daily interest to $1.91. That mean every day you are paying $.27 cents a day more in interest. Doesn’t seem like much but I’m sure you can think of better than to spend that over $8.00 extra on in a month.
Why this is especially important is this interest has to be paid either way so by paying it before it capitalizes you can avoid paying extra and have a little extra money to put in your pocket (or towards your loan–think even less future interest!)