Glossary term
Capitalized Interest
Capitalized interest is unpaid interest that gets added to a loan's principal balance. After capitalization, you pay interest on that interest, which raises both your payment and total cost. It commonly happens with student loans after periods when payments are paused, such as school, a grace period or certain forbearance and deferment periods.
Updated October 17, 2026 · Editorial Team
How Capitalized Interest works in practice
While payments are not required, interest may keep accruing on some loans. When the pause ends, the lender can add that accrued interest to principal. From then on, the loan's payment and interest are calculated on the larger balance. Paying interest as it accrues, even in small amounts, prevents it from capitalizing.
Say you borrow $20,000 at 6.00% and $4,800 of simple interest builds up over four years of school. If you pay that interest along the way, you then repay $20,000 over 10 years at $222.04 a month, for a total of $4,800.00 + $26,644.80 = $31,444.80. If it capitalizes, you repay $24,800 at $275.33 a month, or $33,039.60, which is $1,594.80 more.
Knowing when capitalization happens on your loans helps you decide whether to make interest payments during a pause. Federal student loan rules spell out which events trigger capitalization; check your servicer for your loans.
Capitalized Interest: quick questions
When does interest capitalize on student loans?
Typically after a pause in payments ends, such as a grace period or some deferment or forbearance periods. Rules differ by loan type.
How can I avoid capitalized interest?
Pay the accrued interest before the pause ends, or make interest-only payments while it accrues.
Does capitalized interest raise my monthly payment?
Usually, because the payment is recalculated on the higher principal balance.
Sources
- Student loan repayment plans — Federal Student Aid (U.S. Department of Education). Accessed October 17, 2026.
- Student loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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