Is It Legal For Navient to Add Capitalized Interest to the Student Loan Balance?

Question:

Dear Steve,

My son’s student debt is in repayment now for the 22nd year, late with their payments by a week or two, many times.

The loan servicer (Navient) added almost $20 thousand capitalized interest to the loan due to this, plus charged late payment fees on top of that.

Is it legal for a student loan servicer to add capitalized interest to your loan whenever you are late paying, in addition to a late payment fee?

Carolyn

Answer:

Dear Carolyn,

You didn’t mention if these were private or federal student loans, so I’m answering in general.

The most authoritative document to refer to will always be the loan agreement. In that legal document, you will find what the lender policy is. A late fee is always possible when missing deadlines.

Navient does say, “Interest capitalization is when Unpaid Interest is added to the Unpaid Principal. This occurs at certain times during the life of the loan, typically at the end of the grace period, a deferment, or a forbearance. Depending on your loan program and promissory note, interest may also be capitalized periodically during certain periods when payments are postponed and in connection with certain repayment plans.

Capitalization will cause the principal balance to increase, and future interest will accrue on that larger balance.” – Source

From what you shared, that does seem to address a potentially similar situation.

According to NerdWallet:

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

There are several situations in which interest capitalizes.

For federal student loans, capitalization of unpaid interest occurs:

When the grace period ends on an unsubsidized loan.
After a period of forbearance.
After a period of deferment for unsubsidized loans.
If you leave the Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE) or Income-Based-Repayment (IBR) plan.
If you don’t recertify your income annually for the REPAYE, PAYE, and IBR plans.
If you no longer qualify to make payments based on your income under PAYE or IBR.
If you’re on the Income-Contingent Repayment (ICR) plan, it capitalizes annually.
When you consolidate federal loans.

For private student loans, interest capitalization typically happens in the situations below, but check with your lender to confirm.

At the end of the grace period.
After a period of deferment.
After a period of forbearance.

I think these may be federal student loans your son owes. If he could meet his monthly payments, a plan would be to consolidate his loans into an Income-Driven Repayment plan and always make the required payment.

The downside to the Income-Driven Repayment (IDR) plans is that he will likely never be out of debt unless he is credited with making past payments or makes enough future payments to reach the 20 or 25-year forgiveness plan. However, it will give him the lowest payment.

Additionally, if the Biden Student Loan Forgiveness plan happens, at least some of his debt would be eliminated if he applied for forgiveness.