Capitalization AFTER grace period?

[amad01]

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I am confused about interest accrual on unsub fed loans. If capitalization doesn't occur until after grace period, wouldn't this mean loans are accruing interest at a constant rate (not increasing amount of interest) each day?

Ex: $10,000 loan at 7% interest would accrue %1.92 per day

Because the interest is not capitalizing, wouldn't this mean the 1.92 is steady ($1.92 everyday rather than $1.93 tomorrow, $1.94 the next day, $2.05 next week, and so on) until it capitalizes? Basically simple interest until it capitalizes then compounding interest?

If I took out the same loan at the same rate at a bank, the interest would capitalize monthly/daily and my "daily interest" accrual would be steady increasing. Does this mean the fed loan will actually come out less than what my financial calculator tells me since the interest isn't capitalizing?

 

[sazerac]

Yes you understand capitalization. When your interest is not being capitalized, you can think of it being put aside into a special bank account that has 0% interest. When that interest does eventually capitalize, that balance gets moved into your regular loan.

If your loan interest is not capitalizing, then your interest per unit time will be a constant, and the total amount you owe will grow at a constant linear rate (instead of the exponential rate we are more used to).

Any ordinary loan calculator is guaranteed to get the capitalization rules wrong on federal student loans, because the capitalization rules are pretty unique. The most accurate calculator by far is the AAMC MedLoans Calculator.

 

[James Martin]

Capitalizing on the grace period's break on interest charges can save the typical cardholder a couple hundred bucks a year. The grace period is the window of time from the end of your billing cycle to the due date for that cycle. Paying your new balance in full by the due date triggers a break on interest on new purchases during the current billing cycle -- if you pay in full consistently. While the grace period is referred to as an interest free period, the break on interest extends to the dates that purchases are made and posted to your balance.