Letting interest capitalize can make a big difference

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!)