What is loan capitalization?
Capitalization refers to when your interest on a loan can start creating interest of its own. In most loans on the planet capitalization is instantaneous, which is why most people aren’t familiar with the term, but there is this weird clause with student loans that as long as you are in school or making financial hardship IBR payments, all your interest goes into a "penalty box" and only the original loans create more interest. Once you start making non-hardship IBR payments (typically occurs when you are done with residency and are now an attending) all that interest in the "penalty box" gets piled onto the no credit check pay day loan and now the whole enchilada starts creating interest payments.
If you borrow an unsubsidized loan (unsubsidized Stafford or Grad PLUS), interest accrual starts at the time the loan is disbursed. As a general rule, your accrued interest will be added to your principal balance at the end of your grace period and generally after each status change (for example, deferment, forbearance, etc). Remember that capitalization is the point at which the accrued interest gets added to the original principal amount borrowed. New interest then starts accruing on the combined principal + accrued interest.
