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Capitalized Interest Formula:
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Capitalized interest refers to unpaid interest that is added to the principal balance of a loan. This commonly occurs with student loans during periods of deferment or forbearance when payments are temporarily paused but interest continues to accrue.
The calculator uses the compound interest formula:
Where:
Explanation: The formula calculates how much interest will be added to your loan principal over a specific period based on the compounding frequency.
Details: Understanding capitalized interest is crucial for student loan borrowers as it significantly increases the total repayment amount. This calculation helps borrowers make informed decisions about making interest payments during deferment periods to avoid capitalization.
Tips: Enter your principal loan amount in USD, annual interest rate as a percentage, the capitalization period in years, and select how frequently interest compounds. All values must be positive numbers.
Q1: When does interest capitalize on student loans?
A: Interest typically capitalizes at the end of grace periods, deferment, forbearance, or when changing repayment plans.
Q2: How can I avoid capitalized interest?
A: Making interest-only payments during periods of non-payment (deferment/forbearance) prevents interest from capitalizing.
Q3: Does capitalized interest affect my credit score?
A: No, capitalization itself doesn't affect your credit score, but it increases your debt burden which could impact future credit applications.
Q4: Is capitalized interest tax deductible?
A: Student loan interest, including capitalized interest, may be tax deductible up to certain limits if you meet eligibility requirements.
Q5: How often does interest capitalize on federal student loans?
A: For most federal student loans, interest capitalizes at specific events like the end of grace periods or when leaving deferment/forbearance.