USA Funds Provides Guidance on Capitalizing Interest at Claim Filing

Regulations permit lenders to capitalize interest on some loans prior to filing a claim, as noted in the following:

• For all loans in repayment status, a lender may capitalize interest through the date on which it receives documentation of a death, disability, closed school or false certification.
• For a claim-eligible bankruptcy, a lender may capitalize unsubsidized interest for a period of delinquency that precedes the bankruptcy petition through the date the borrower filed the bankruptcy petition. If the loan reflects a deferment or forbearance from the date that the borrower filed the petition through the notification date, the lender may capitalize unsubsidized interest through the date that it receives the bankruptcy notification.
• If the loan is identified as an ineligible loan due to borrower or student error, the lender is permitted to capitalize interest that is refunded to the U.S. Department of Education.
• For unsubsidized Stafford loans first disbursed on or after Oct. 7, 1998, through June 30, 2000, and both subsidized and unsubsidized Stafford loans first disbursed on or after July 1, 2000, the lender may capitalize unpaid interest when the loan defaults. The loan is considered to have defaulted on the 270th day of delinquency.

The following are some examples of circumstances in which lenders are not permitted to capitalize interest:

• On defaulted loans, through the date of default on PLUS, Grad PLUS, SLS or Consolidation loans.
• On Stafford loans (subsidized and unsubsidized), between the date of default and the date that the lender files the claim.
• For loans that are not in repayment status, a lender may not capitalize outstanding interest based on the receipt of information indicating that the loan may be eligible for discharge or forgiveness under provisions for death, disability, closed school or false certification.