capitalization of interest

Question

When does interest capitalize on a Unsubsidized stafford loan and Graduate plus loan?
I have found several contradictory answers:
There are 3 cases :
If I borrow 10000 with 6.8% interest
year1 $680 interest
year 2 $680 interest
6 month deferment period $340

a) I agree to pay interest monthly
6 months post graduation: I have balance of 10000

b) I defer interest
6 months post graduation: I have balance of 10000+680+680+340 = $11700

c) I defer interest but prepay as possible(ex $300)
6 months post graduation: I have balance of 10000+680+680+340-$300 = $11400

Is this correct?

skaballet · Answer

Interest capitalizes over time.

If you take out $10K at the beginning of year 1 your interest will not be the same for Year 1 and Year 2. Year 2 interest would be 6.8% on top of the $10K + Year 1 interest. You get interest statements quarterly and can pay down your interest over time if you choose to do so. This is what I did. You certainly don't have to, you just end up paying more later.

ani123 · Answer

Thanks Skaballet
I had also posted to the student Ed loan website email and they responded saying

"The borrower may choose to repay the interest during the in-school, grace or deferment period or have the lender capitalize the interest and add it to the loan principal when the period ends. (Capitalizing the interest causes the total loan amount to increase.) A borrower may pay the interest either monthly or quarterly.

You may prepay an entire Department of Education loan, or any part of it, at any time without penalty. You should contact the loan servicer for more information."

So essentially if I get an in school deferment +6 months post grad deferment. The capitalization should occur at the end of that period right?

Hence if I pay interest in first year or few months before the deferment ends I am in the same boat.

Is my understanding correct on this?

skaballet · Answer

No, the interest capitalizes cumulatively over time. I think it's figured monthly (or maybe quarterly). Deferment refers to the fact that you do not have to start making payments on the loan immediately. You wait until after graduation +6 months. It has nothing to do with interest. Interest is always accumulating as long as you have the loan.

highhopes · Answer

I actually have been meaning to call them to clarify. My understanding is that you are supposed to be making monthly or quarterly payments while you are in school (as skaballet said). That is the whole point of unsubsidized - you still pay the interest. For subsidized, while you are in school, the government pays the interest on your behalf. However, I have never received a bill and when I log in to look at my balance, my interest is accruing, yet the principal is unchanged, so I can't really figure it out. I decided to just pay it monthly and not worry about it.

ani123 · Answer

Thanks Skaballet and Highhopes.

Highhopes please let me know once you get the clarification.
Capitalization at end of deferment:
 principle interest
1yr 10000 $680(+680)
2yr 10000 $1360(680+680)
6 month 10000 $1700(680+680+340)
-----------------------------

Then Principle becomes 11700 if no interest has been paid in the 2yrs 6 month period.   Then that is very different from Yearly capitalization:

principle interest
1yr 10k 680(+680)
2yr 10,680 1406.24 (726.24+680)
6 month 11406.24 1794.05k(726.24+680+387.81)
-----------------------------
Then Principle becomes 13200.29 if no interest has been paid in the 2yrs 6 month period.

southernstunna · Answer

your loan interest is the kind of thing that you don't want to put an actual number to. Just try to pay it off as quickly as possible. The more you know the more you will want to cry when you see you are 75k bucks in debt at almost 30 haha.

capitalization of interest

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