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UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF POSTSECONDARY EDUCATION

Proposed Regulatory Text for Issue Paper #3: Interest Capitalization

Session Three: December 6-10, 2021

§ 685.202 Charges for which Direct Loan Program borrowers are responsible.

(b) Capitalization. (1) The Secretary may add unpaid accrued interest to the borrower's unpaid principal 

balance. This increase in the principal balance of a loan is called “capitalization.”

(2) Notwithstanding § 685.208(l)(5) and § 685.209(d)(3), for a Direct Loan not eligible for interest 

subsidies during periods of deferment, the Secretary capitalizes the unpaid interest that has accrued on 

the loan upon the expiration of the deferment.

§ 685.209 Income-contingent repayment plans.

.

...

Deleted: (2) For a Direct Unsubsidized Loan or a Direct 

Unsubsidized Consolidation Loan that qualifies for a grace period 

under the regulations that were in effect for consolidation 

applications received before July 1, 2006, or for a Direct PLUS Loan, 

the Secretary may capitalize the unpaid interest that accrues on the 

loan when the borrower enters repayment.¶

Deleted: 3

Deleted: and for all Direct Loans during periods of forbearance, 

Deleted: or forbearance

Deleted: (4) Except as provided in paragraph (b)(3) of this section 

and in § 685.208(l)(5), and § 685.209(d)(3), the Secretary annually 

capitalizes unpaid interest when the borrower is paying under the 

alternative or income contingent repayment plans and the 

borrower's scheduled payments do not cover the interest that has 

accrued on the loan.¶

(5) The Secretary may capitalize unpaid interest when the borrower 

defaults on the loan.

Deleted: (a)(2)(iv)(A) Except as provided in paragraph (a)(2)(iii) of 

this section, accrued interest is capitalized—¶

(1) wWhen a borrower is determined to no longer have a partial 

financial hardship; or

Deleted: ¶

Deleted: (2) At the time a borrower chooses to leave the Pay As 

repayment plan

Deleted: (B)(1) The amount of accrued interest capitalized under 

paragraph (a)(2)(iv)(A)(1) of this section is limited to 10 percent of 

the original principal balance at the time the borrower entered 

repayment under the Pay As You Earn repayment plan.

Deleted: (2B-) After the amount of accrued interest reaches the 

limit described in paragraph (a)(2)(iv)(B)(1) of this section, interest 

continues to accrue, but is not capitalized while the borrower 

remains on the Pay As You Earn repayment plan.

Deleted: ¶

Deleted: (b)(3)(iv) Limitation on capitalization of interest. If the 

amount of a borrower's monthly payment is less than the accrued 

interest, the unpaid interest is capitalized until the outstanding 

principal amount is 10 percent greater than the original principal 

amount. After the outstanding principal amount is 10 percent 

greater than the original amount, interest continues to accrue but is 

not capitalized. For purposes of this paragraph, the original amount 

is the amount owed by the borrower when the borrower enters 

repayment.¶

...¶

(c)(2)(iv) Any unpaid accrued interest is capitalized at the time a 

borrower leaves the REPAYE plan.
Interest cap session three 2

Last updated 11/29/2021