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It capitalizes at graduation (or more accurately, when you begin repayment after the grace period). The smarter move would be to borrow less next semester and use the money you have for tuition/living expenses.

NoBladesNoBows wrote:Right but that assumes the ability to perfectly predict all of your expenses, which is a high risk vs. med reward scenario (more expensive sure, but if you have an emergency requiring a few thousand dollars that you cannot get, long-term implications are potentially much worse). Thanks for the answer though!

At least for federal loans, if you end up not needing money you can cancel all or part of the loan within 120 days of disbursement and pay no interest/fees on the part that you return. So if you can't perfectly predict it, that's okay because you can return it before 120 days is up and essentially have enjoyed a 120 day interest free loan.

Source:
https://studentaid.ed.gov/repay-loans/u ... n-i-cancel