What is Capitalization?
Capitalization meaning The addition of unpaid interest to the principal balance of a loan. When the interest is not paid as it accrues during the grace period or periods of in-school status, deferment, or forbearance, your lender may capitalize the interest. This increases the outstanding principal amount due on the loan and may cause your monthly payment amount to increase. Interest is then charged on that higher principal balance, increasing the overall cost of the loan.
reference: Federal Student Aid – Glossary