If you have ever looked at the account statements that come in the mail, you maybe have considered using a few choice words to describe the amount of money you have taken out to pay for school. As you might know interest is continually accruing on that money and at some point if you don’t pay down that interest, it capitalizes and becomes part of the principal balance.
As you can imagine, interest capitalization can cost you, the borrower, a lot of money over the course of your repayment term. The best way to avoid it is to find some way to pay down your interest before it capitalizes. Talking about interest capitalization with your lender or financial aid officer definitely doesn’t sound like fun activity, but knowing your lenders policies can help you to save money in the long run.
Specifically knowing the frequency of when your lender capitalizes or their capitalization policy is the first and most important of these questions. Total Higher Education (T.H.E.)’s capitalization policy is very borrower-friendly. Only at the time of repayment do we capitalize your interest. For most borrowers this only happens once over the course of their repayment term.
So before you start spewing choice words, be sure you understand your individual loan situation and avoid capitalization whenever possible! And remember, the end result is Capitalization is a four-letter word – the word is: SAVE.
**Hint: Applying for deferment or forbearance on your loan BEFORE your grace period begins can avoid your loan going into repayment, and then into postponement, thus avoiding capitalization.
I agree that capitalization should be a four-letter word, but what can you do about it? I'd love to pay the interest down (or not have to take out loans at all) but that is just not possible in my situation. Like a few others have mentioned here, I feel like I'm between a rock and a hard place. I'm still getting used to the idea that for the first time in my life my finances are in the red, WAY in the red... and I'm only in my first term of school. Yay. $200,000 debt: here I come. :(
med student:
When you initially enter repayment on your consolidation loan (which has no grace period) your request for hardship defement will only consider the loan that is about about to enter repayment.
There are a lot of nifty calculators to help you determine your eligibility. You can use T.H.E’s calculator by using the below link:
https://www.theloanprogram.org/tlc/Calculators/HardshipCalc.aspx
Other insights on deferment eligibility:
- Even if you have chosen an extended repayment plan or consolidated, your debt-to-income ratio is always based on the standard 10-year repayment plan
- Income can be proved in two ways: current pay stub or previous year’s tax return
- With T.H.E our policy is as follows: if in the previous year you did not work, therefore did not file income tax, simply state that you had no earnings and filed no income tax.
As graduation approaches, the Ramen Report will be a great source of information on deferment, forbearance, repayment strategies and much more, so keep checking back!
This looks like a great site! And I can't argue with a chance for $100. As far as capitalization, I have all subsidized loans (thanks to my Air Force scholarship), so I haven't had to worry about interest yet. Yay!
I have been very impressed with the low interest rates and the prompt, professional service that T.H.E. offers. I recommend this service, because everyone needs help and the best help is help that helps everyone else! Thank you...
I agree with JM. If you have extra money, you should just take out less money in loans rather than pay off interest, right? Although, once we're done with school and in residency and no longer taking out loans, we should pay off as much interest as we can before repayment begins.
So, it's all fine and dandy to say, "pay off the interest before your loan goes into repayment" but what exactly are you paying it off with? If you're living off of the loans you have borrowed there should not be 'extra' money unless you have money left over in your budget. So, that would mean your paying the interest off for your loans with your loan money! Ok, that's just wrong.
I have a question about economic hardship deferrment. I have been told that I may not have borrowed enough to qualify for economic hardship when I graduate from medical school. I consolidated the first three years of my loans which will go into repayment when I graduate, but the loans from my fourth year will not go into repayment until 6 months after I graduate. Is it true that I will only be able to report my consolidated loans when I initially apply for economic hardship (and therefore will not have borrowed enough)?
Although not a student, I find this site helpful as well (as a parent). Could use the $100 to make an interest payment!
another_med_student:
If you have consolidated you have NOT given up your deferment eligibility (common myth).
Capitalization happens when the loan is consolidated, so it does affect your student loans that way. With T.H.E. the loan will only capitalize again upon repayment, just like Stafford loans, but this is not common practice for all lenders.
It makes me ill thinking about how much I am going to owe after this is all over, it better be worth it!! I think this blog is a good idea, bc I always have questions! Thanks for thinking of this!
definitely - compared to credit cards, student loans are way more reasonable. i try to minimize the capitalization on my student loans, but i don't stress about it if i need to pay off my credit cards instead.
Student loans are cheap! Capitalization shouldn't ruffle your feathers. Compare current interest rates (e.g. www.bankrate.com) for homes, cars, or your gready credit cards and you'll be pleased with last year's 4.75% T.H.E. consolidation. Your locked-in interest rate may even be below the yield on today's high interest CDs. What's the rush to pay it back? Use future income to responsibly invest, pay the monthly minimum on your cheapest loans, and consider your low interest student loans a gift from Uncle Sam for a degree well earned.
I consolidated some of my loans...does that mean I will not be able to take advantage of deferment? Is capitalization a real concern for consolidated loans? I'm hoping I didn't make a poor decision when I consolidated. Perhaps I should go back to eating only Ramen.
Hmmm. I like ramen noodles but I hate loans...I don't see the connection. But at least I get a chance to win $100. More money to buy Ramen noodles!!!
Different lenders have different capitalization policies. It is definitely a feature worth researching when evaluating a lender. T.H.E. capitalizes accrued interest once at repayment.
A typical medical student who has four years of in-school status and then moves immediately into three years of a hardship deferment, followed by a year or two of a forbearance, will have no capping of accrued interest until they truly enter repayment. This means that throughout residency the borrower can make payments towards interest and reduce the impact of that future capitalization. Making payments will not affect your eligibility for a deferment or forbearance. Some borrowers may request a deferment or forbearance after they have been in repayment for a while. In those situations there will be another capping of interest beyond the original because the borrower has entered a period of postponement that results in interest accrual. Once this deferment or forbearance ends and the borrower again enters repayment, capitalization will occur again.
I think this article might be more helpful if it specifically said when the capitalization occurs for THE loans. Since I'm a med student, I think I officially must enter repayment at the end of residency, but I should be able to pay during residency as well if I choose to. So as soon as I start paying, does the interest get capitalized? Does it get capitalized when I officially would enter repayment (end of residency?) Or is it some other unspecified time over the life of the loan, that requires me to call someone and ask?
Or do what I didn't do - pick a school that can help you maintain a reasonably inexpensive student lifestyle, based on your resources, so that you can stick to Federal loans like Stafford Subsidized where capitalization doesn't become an issue.
Then again, will anyone see this if they've already followed that advice? {:^)
I just paid down my interest, after having been in school for all of one and a half months, and it was already $200! It makes sense to pay it off every couple of months, because it will snowball quickly.