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Interest Capitalization

Capitalization is the addition of unpaid interest to the principal balance of your loan. The principal balance of a loan increases when payments are postponed during periods of deferment or forbearance and unpaid interest is capitalized. As a result, more interest may accrue over the life of the loan, the monthly payment amount may be higher, or more payments may be required. The chart below provides estimates, for a $15,000 unsubsidized loan balance at a 6.8% interest rate, of the monthly payments due following a 12- month deferment that started when the loan entered repayment. It compares the effects of paying the interest as it accrues, capitalizing the interest at the end of the deferment, and capitalizing interest quarterly and at the end of the deferment. Please note that the U.S. Department of Education (the Department) and many other holders do not capitalize interest on a quarterly basis. The actual loan interest cost will depend on your interest rate, length of the deferment, and frequency of capitalization. Paying interest during the period of deferment lowers the monthly payment by about $12 and saves about $426 over the lifetime of the loan.

Treatment of Interest Accrued During Deferment
Interest is paid Interest is capitalized at the end of deferment Interest is capitalized quarterly during deferment and at the end of deferment
Loan Amount $15,000.00 $15,000.00 $15,000.00
Capitalized Interest for 12 Months $0.00 $1,022.09 $1,048.51
Principal to Be Repaid $15,000.00 $16,022.09 $16,048.51
Monthly Payment $172.62 $184.38 $184.69
Number of Payments 120 120 120
Total Amount Repaid $21,736.55 * $22,125.94 $22,162.41
Total Interest Paid $6,730.66 $7,119.64 $7,156.10

*Total amount repaid includes $1,022.09 of interest paid during the 12-month period of deferment. back

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