Receiving Aid in '08-'09
Capitalization of Interest
If you request, and the federal government grants you, deferment of interest payments on a federal direct loan after your grace period, be aware that the interest on your loan will continue to accumulate during deferment. Periodically, the accrued interest will be capitalized—added to the principal, so you will also pay interest on the accrued interest. The disadvantage to capitalizing interest is that you pay more interest over the life of the loan.
If you owe $5,000 in principal at 8% interest, approximately $33.33 in interest will accrue on your loan each month. If the interest is capitalized quarterly (every three months), approximately $99.99 will be added to your principal. At the end of one quarter the principal will increase to $5,099.00, and interest will accrue on that amount for the next quarter. Depending upon how much you borrow, this could cost you a substantial amount.