How does interest accrue while I am in school?

Interest accrued while you’re in school can be “capitalized,” meaning it is added to your loan’s unpaid principal balance. When capitalization occurs, you are charged interest on interest.

For example, if you borrow $5,000 at a 10% annual rate for a 12-month program, then you will accrue $500 while you’re in school and $250 during the six-month grace period, for a total of $750 in accrued interest by the end of the grace period. Capitalization adds that $750 to the principal balance, for a total of $5,750. Interest will continue to accrue from $5,750.

Capitalization occurs at specific times . For example, the interest on federal loans capitalizes when a period of deferment ends on an unsubsidized loan. If you are under an income-based repayment (IBR) plan and you no longer qualify or if you leave the plan, unpaid interest capitalizes. Private loans typically capitalize when the grace period, deferment, or forbearance ends. Consult your lender for details about interest on your student loans.

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