Capitalized Interest on Income-Driven Repayment

Capitalized interest on income-driven repayment is the most insidious practice, routinely inflating balances beyond original loan amounts. Unpaid interest capitalizes when borrowers recertify or leave plans, turning a $30,000 loan into over $60,000—a 100% increase—because interest compounds on a larger principal. This practice outperforms #2 (Servicer-Driven Payment Misallocation) in sheer financial harm, as it directly multiplies debt without borrowers making progress. Data shows borrowers on income-driven plans for 20 years often owe 50% more than they borrowed, making this a debt trap.