Definition
Unpaid interest that gets added to a loan's principal balance, so that future interest is charged on it too. It is common on student loans when a deferment, forbearance, or grace period ends and the accrued interest has not been paid.
Why it matters
Capitalization is how a balance grows even though you never borrowed more. Paying accrued interest before it capitalizes, even in small amounts, prevents interest on interest and keeps the payoff schedule honest.
Example
A student owes $30,000 in unsubsidized loans at 6% and lets interest accrue for four years of school plus a six-month grace period: about $8,100. When repayment begins, that interest capitalizes into a $38,100 principal, and at 6% the loan now generates about $190 of interest a month instead of $150.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.