Capitalisation occurs when the unpaid interest on a loan is added to the loan’s principal balance. In the context of study abroad loans, capitalisation typically occurs when the borrower enters a new repayment status, such as the end of a deferment or grace period, resulting in an increase in the total amount owed.
Key Aspects of Capitalisation
Accrual of Unpaid Interest
If a borrower fails to make payments covering the accruing interest, the interest will continue to accumulate. Alternatively, if their loan enters deferment or forbearance—periods when payments are not required—the accruing interest will also continue to accumulate.
Transition Points
Capitalisation often occurs at specific transition points, such as when the borrower moves from a deferment or grace period to the repayment phase. It may also occur when leaving an income-driven repayment plan or under other circumstances outlined in the loan agreement.
Impact on Total Loan Amount
When capitalisation occurs, the unpaid interest is added to the principal balance of the loan. As a result, the total amount owed (principal plus any capitalised interest) increases, potentially leading to a higher overall loan amount.
Capitalisation Decoded
End of Deferment or Grace Period
After a period of deferment or grace, the borrower may enter the repayment phase. At this point, any unpaid interest accrued during the deferment or grace period may be capitalised, increasing the total loan amount.
Exiting Income-Driven Repayment Plans
For borrowers on income-driven repayment plans, monthly payments may not cover the accruing interest, leading to the accumulation of unpaid interest. When the borrower exits the income-driven plan, this unpaid interest can be capitalised.
Transitioning Between Repayment Status
Capitalization often occurs during transitions between different loan statuses. This includes moving from in-school deferment to the repayment phase or switching between different repayment plans.
Interest Capitalisation Limits
Be aware that some loans limit the amount of interest that can be capitalised, particularly during deferment or forbearance periods. To understand any limitations on interest capitalisation, review your loan terms carefully.
Final Considerations
Understanding the concept of capitalisation is crucial for borrowers managing study abroad loans. While deferment and other periods may provide temporary relief from making payments, the impact of capitalisation should be considered. Borrowers should be proactive in managing their loans, making informed decisions about repayment plans, and exploring options to minimise the total cost of their study abroad financing.