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Guide to Interest Capitalization

February 22, 2015
Photo credit: Simon Cunningham, flickr

Photo credit: Simon Cunningham, flickr

We often receive questions from financial aid advisors about how interest is capitalized on federal student loans. Here is a look at some important details.

In general, loans are capitalized…

Either at the end of the grace period or at the end of deferment or forbearance. (Specifically, this covers the scenario when a borrower enters a period of back-to-back deferment or forbearance. The servicer applies capitalization only once – at the end of the final status change.)

For loans in an income-contingent repayment plan…

Capitalization occurs during periods of negative amortization annually. Negative amortization interest capitalizes only until the principal balance is ten percent greater than what the principal balance was when the borrower entered repayment. Otherwise, normal capitalization rules apply.

For loans in an income-based repayment plan…

Capitalization occurs if the borrower no longer qualifies for payments based on income (no longer has a partial financial hardship) or if they leave income-based repayment early.

For loans in Pay As You Earn…

Capitalization occurs when the borrower no longer qualifies for payments based on income (no longer has a partial financial hardship) or if they leave Pay As You Earn early. Interest capitalizes only until the principal balance is ten percent greater than what the principal balance was when the borrower entered the plan.

Special rule for periods of back-to-back deferment and/or forbearance:

If a borrower enters a series of status changes that would otherwise result in interest capitalization, the servicer will capitalize only once, at the end of the final status change, as illustrated by the following examples.

Example 1

If a borrower is placed on administrative forbearance, then has the forbearance extended as a regular forbearance, and finally is placed in an economic hardship deferment without any breaks between the periods of forbearance and deferment, the accrued interest is not capitalized until the end of the deferment period.

Example 2

If a borrower with a PLUS loan that was first disbursed on or after July 1, 2008 receives an in-school deferment covering the total period of at least half-time enrollment that is immediately followed by a six-month post-enrollment deferment, the interest that accrued from the period of first disbursement to entry into repayment, the in-school deferment, and the post-enrollment deferment is not capitalized until the end of the six-month post-enrollment deferment period because there is no break between the two deferment periods.

Have questions about a specific student’s scenario? Remember that the School Service Center (SSC) is available from 8:00 a.m. to 8:00 p.m. (Eastern) Monday – Friday to assist you, and expedited assistance is provided to school representatives who call with a borrower on the line. You can reach the SSC at 866.463.5638 or SSC@Nelnet.net.

 

Lou Murray, Regional Director, Nelnet Partner Solutions

Lou Murray, Regional Director, Nelnet Partner Solutions

 

 

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