Student Loan Interest Capitalization may be occurring without you even realizing it. This financial event is called negative loan amortization and happens when your monthly payment does not fully pay the interest charge for that month. When the payment shortfall is then added to the loan this is called interest capitalization. Students and parents need to be aware of this situation since it may increase your loan payments and total amount paid over time.
Understanding your student loan repayment plan details is critical to your long term financial success. The term Student Loan Interest Capitalization or negative amortization is a technical term describing that your loan balance is increasing as you are making monthly payments. Some of the Student Loan Repayment plans offer reduced monthly payments but these payments do not cover the entire loan interest resulting in your loan balancing increasing. This is especially true with the income based student loan repayment methods. Having lower monthly payments can be an advantage for the short term but could be a disadvantage for your long term financial health.
Before you select the best repayment plan for you learn the long term impact of your decision. This program will cover:
- Income dependent plans impact (IBR, ICR, ISR, PAYE)
- Advantages of a loan balance increase
- Ways to avoid the Student Loan Negative Amortization
- Importance of Consolidation and Loan Servicer
Proper planning needs to be consider when making this decision. For more information on the entire student loan repayment process please visit our Resource Rage. For an affordable professional solution please contact us.