How Often Does Interest Accrue on Student Loans During School and Beyond

For many students, interest starts accruing on their loans as soon as they're disbursed, regardless of whether they're in school or not.

The good news is that some federal student loans don't charge interest while you're in school at least half-time. This applies to Direct Subsidized Loans, which are need-based loans that don't charge interest while you're enrolled at least half-time.

However, interest can still accrue on unsubsidized loans, such as Direct Unsubsidized Loans and PLUS Loans, even if you're in school. This means you'll need to make payments on the interest, or it will be capitalized and added to the principal balance of your loan.

Student loans come in different forms, and understanding the types can help you manage interest accrual effectively.

Subsidized Direct loans are a great option because they don't accrue interest while you're in school.

The lifetime limit for Subsidized Direct loans is $23,000, so you might need other loans too.

Other loan options are available, but prioritizing Subsidized Direct loans can make sense if you qualify.

You'll need to consider your individual financial situation and loan options to make the best decision.

If you're in school, you might be wondering if interest will accrue on your student loans. The good news is that interest on direct subsidized loans doesn't accrue while you're in college.

Direct subsidized loans are available for undergraduate students and are based on financial need. This means that the Education Department pays the interest while you're in school, during the six-month grace period after you leave school, or if you're in deferment due to unemployment or economic hardship.

However, if you have direct unsubsidized loans, interest begins accruing immediately after disbursal. This means that even when you're not required to make payments, like while you're in school, interest will still generate.

Here's a comparison of interest-only payments vs. no payments while in school:

While in school, interest accrual can be a significant concern for student loan borrowers. You might be able to make interest-only payments, which can save you thousands of dollars.

Most lenders allow borrowers to make interest-only payments while the loan is in deferment, according to Example 2. This can be a smart move, as it can help you avoid capitalizing interest and save money in the long run.

Interest accrues daily on federal student loans, which means your balance will always grow, especially due to capitalized interest (Example 1). For example, if you have a $4,000 Direct Unsubsidized Loan with a 5.50% interest rate and a standard 10-year repayment plan, you can expect to pay $1,209.26 toward interest.

You can see the impact of making interest-only payments in the examples below, taken from Example 2:

This shows that making interest-only payments can save you a significant amount of money in the long run, compared to making no payments at all.

Under income-driven repayment plans, the required monthly payment based on the borrower's income isn't enough to cover the interest that accumulates on the account. This can lead to a significant amount of unpaid interest, such as $150 per month.

The unpaid interest is then added to the principal balance, causing the borrower's total debt to increase over time. This is why some borrowers' balances went up over time, even if they were making payments.

For example, if you owe $80,000 in student loans at an average interest rate of 6%, the interest on your loans accumulates at the rate of $400 per month. This can be a huge burden for borrowers who are already struggling to make ends meet.

Interest continues to accrue during deferment and forbearance, depending on the type of student loan you have.

If you have subsidized loans or federal Perkins Loans, interest won't accrue during deferment. However, for other types of loans, interest will generally accrue and can capitalize into the loan balance when the deferment ends.

You have the option of making interest-only payments during your deferment to avoid this.

Here's a breakdown of interest accrual during deferment and forbearance for different types of loans:

Note that if you're granted forbearance due to serving in a specific position or program, interest won't accrue during that time.

Federal Deferment can be a lifesaver for students struggling to make loan payments while in school. During in-school deferment, you can pause payments on your federal loans.

Interest will generally accrue on your loan during deferment, which can capitalize into the loan balance when the deferment ends. This means your loan balance will increase, and you'll owe more money.

If you have subsidized loans or federal Perkins Loans, interest won't accrue during deferment, which is a big relief. This can save you money and reduce the amount you owe.

You have the option of making interest-only payments during your deferment to avoid capitalizing interest, which can help keep your loan balance from growing.

Federal forbearance is a bit different from deferment, and it's worth understanding. You can request a forbearance if you're having trouble making your payments for any reason, and your student loan servicer may grant it.

Interest will accrue during forbearance, no matter what type of loan you have. This means you'll still be charged interest on your loan, even if you're not making payments.

You qualify for mandatory forbearance in certain situations. For example, if you're serving in an AmeriCorps position, working for the Department of Defense or National Guard, or participating in a medical or dental residency program, you may be eligible for mandatory forbearance.

During the COVID-19 pandemic, the government announced an administrative forbearance on all federal student loans. This meant that loan payments were temporarily suspended and interest rates moved to 0%.

The grace period - a much-needed break after graduation or leaving school. Most student loans have a grace period, which can last anywhere from 6 to 9 months.

During this time, you're not responsible for making payments, but interest continues to accrue on most types of loans. The exception is federal subsidized loans, where the government pays the interest during the grace period.

Here's a breakdown of the typical grace periods for different types of student loans:

Remember, the grace period is a temporary reprieve, and interest will continue to accumulate on most loans.

During deferment, you aren't required to make payments on your student loans. Interest may still accrue, depending on the type of loan you have.

If you're not making payments, it's likely that interest will accrue on your loan. This means you'll owe more money when payments resume.

Deferment is a temporary pause on payments, not a forgiveness of interest. So, it's essential to understand how interest works during this time.

Private loans start accruing interest as soon as they're disbursed, and interest typically accrues daily.

Interest on private student loans begins immediately after the loan disbursement date, and some lenders allow students to choose from different repayment plans.

Most private lenders allow borrowers to pay nothing toward their student loans while enrolled in school, but this can lead to capitalization of interest after graduation.

Borrowers with private student loans can also choose to pay a set amount toward their loans each month while in school, which can reduce the total loan cost by 6%.

Paying interest-only payments while in school can reduce the total loan amount by 13% compared to borrowers who do not make payments while in school.

Here are some common payment plans offered by private lenders while you're in school:

Federal student loans accrue interest daily, which means your balance will always grow, especially due to capitalized interest.

For most federal loans, interest starts accruing as soon as the lender disburses the funds. However, subsidized loans are an exception, as interest only starts accruing after you leave school or drop below half-time status, and after a 6-month grace period ends.

The interest rate for subsidized loans is 5.50%, and it accrues daily. This can save you thousands of dollars throughout your repayment term.

Direct PLUS Loans, on the other hand, start accruing interest as soon as the loan is disbursed, with an interest rate of 8.05%.

Here's a breakdown of how interest accrues for each type of federal loan:

Interest on unsubsidized loans starts accruing as soon as the funds are sent to your school, and it continues to accrue while you're in school and during your six-month grace period.