That interest gets lumped onto your total known as interest capitalization unlessyou pay it off first.
Doing that could save you a wad of dough.
What Is Interest Capitalization?
To understand interest capitalization, you gotta know a little more about your loan.
No Interest Til Almost 2027?
Its different than it is with a lot of kinds of other consumer credit.
After that, all of the accrued interest gets added to your principal.
And at that point, you continue accruing interest on the new higher total also known ascompound interest.
How Does Interest Capitalization Affect My Student Loan?
Its easiest to explain how interest capitalization works with an example.
Did you know?
Each year of college, they accrue $300 in interest ($5,000 x 6%).
As a result, Janes total principal remains $20,000.
The $3,600 on Joes loan is capitalized and his new total stands at $23,600.
When Does Interest Capitalization Occur?
And heres the kicker about income-driven repayment plans.
How Can I Avoid Interest Capitalization or at Least Reduce It?
Paying off your interest before any of the triggering events is the only way to completely avoid interest capitalization.
We kept things simple for our example, but your interest rate will probably be different for each loan.
you’re free to also make interest-only payments during forbearance or deferment.
We have plenty of ways to make extra money, whether itsworking side hustles,selling stuff onlineordoing nothing.
After all, its in your best interest.
(Sorry, couldnt help myself.)
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder.
Readher bio and other work here, then catch her on Twitter @TiffanyWendeln.
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