As I understand it, for many student loans, when you take out the loan, there is a daily, fixed, simple interest that accrues. This accrues on the principal but does not capitalize. Therefore, if I am in school for 3 academic years, upon graduating, I then owe

Total = P + r_{daily}*P * 2.75 * 365

2.75 because I graduate in June.

After I graduate, I have a 6 month grace period during which interest continues to accrue but does not capitalize. So it's the same thing. If I still don't pay anything, when the grace period ends, I owe

Total = P + r_{daily}*P * 3.25 * 365

where the 3.25 comes from the additional 6 months. Let's suppose I couldn't pay my loans up to this point, perhaps because I couldn't find work. Now I get happen to get a job right at the end of this grace period. But too late, it ends and my interest gets capitalized.

So now future interest is calculated based on Total = P + r_{daily}*P * 3.25 * 365 instead of just P.

Now suppose my job isn't very good and I can't quite cover my interest payments. Would my daily accrual now capitalize daily as well?

I know this is all very speculative, but the point I was trying to understand was, does capitalization of loans only happen once or does it happen daily after the grace period is over?

I am using two types of loans

Any clarification on this would be great.

1 Answer 1


Unsubsidized loans will capitalize once after the grace period and then capitalize/compound periodically (most likely monthly) if you do not pay at least the interest portion.

I have never seen a loan that compounds daily - most likely it will compound monthly. However, even a loan that compounds daily would not be significantly worse than one that compounds monthly.

For example, if you had a balance of $10,000 at 5%, the balance after 1 year with daily compounding would be

10,000 * (1+.05/365)^365 = 10,512.67

versus monthly compounding:

10,000 * (1+.05/12)^12   = 10,511.62

or a difference of 0.01%

If you have unsubsidized loans, paying off the interest while you are in school will have a much greater impact than the compounding period.

If you are taking out student loans and aren't certain that you can get a job that will cover them, I would strongly recommend NOT taking out loans - find a school that you can afford to pay without loans, or choose a field of study that mas more certain job prospects. Having student loans over your head without the ability to pay them back will be a huge burden that will stay with you for many years.

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