School Loan Repayment: Interest Accrued and Capitalized Interest Explained

You've graduated college and your on your way to a new an exciting career in your chosen field. After you're done celebrating your success it's now time to sit down and figure out how to repay all those school loans you accumulated during your trek to a degree. This can be an over-bearing situation that can stress even the most tempered of person. If you find yourself behind on your payments, in forbearance, or deferment, your going to need to understand what interest accrued and interest capitalization is so you can ensure you don't add to your loan principal. You need to pay extra attention to these two terms as making the wrong choice can ultimately cost you hundreds or thousands of dollars over the course of repayment.

Interest accrued is any interest on your outstanding principal that has not been paid. If your current student loans are in forbearance or deferment you will receive a monthly statement detailing how much interest accrued that month. You will have the option to let this interest accumulate or pay it off each month or over the course of your deferment. When your forbearance or deferment ends, any outstanding interest that was unpaid will then be capitalized. It is imperative that you do anything you can to get the interest accrued paid off before the end of your deferment or forbearance.

For example, let's say you have $15,000 in school loans that accumulate $75 in monthly interest during a six-month forbearance. The grand total in accrued interest over this time period will be $450. If you don't pay off this interest during your forbearance, when your school loan payments resume you will now have a principle of $15,450. This leaves you paying interest over the course of the loan on the accrued interest you accumulated over the deferred time-frame. This raises the monthly payments you need to repay each month for the rest of your loan. Also make sure to ask your lender if this interest accumulates quarterly, or at the end of the deferment. If it's quarterly, make sure you pay the monthly balance in interest so it doesn't become added to your principle.

Capitalized interest is the term used when the accrued interest is left unpaid and becomes added to your principal such as in the example above. In essence, your paying interest on the interest which leads to higher monthly payments over the course of repayment. This can turn a bad situation worse, or leave you scrambling to find extra money each month. Understanding these terms from the beginning can save you thousands of dollars over the course of repayment, and help ease the burden during your tough times.

Sources:
Accrued Interest Definition, Investopedia
samanthab, What Is Capitalized Interest?, Student Loan Network