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When you borrow money, you don’t get it for free. Lenders generally charge you interest — a percentage of the loan amount that you pay back in addition to the amount you borrowed. Put simply, it’s the cost of borrowing money.
Student loans work like that, too — but with a few differences from other types of loans. We’ll go over how student loan interest works and when it starts to accrue.
Here’s when interest starts on student loans:
- When does interest begin accruing on student loans?
- When do I have to pay interest on subsidized loans?
- When do I have to pay interest on unsubsidized loans?
- When do private student loans begin accruing interest?
- Do student loans have grace periods?
- How does interest work during deferment and forbearance?
- Are there tax benefits to student loan interest?
- How to save money on student loans
When does interest begin accruing on student loans?
With most types of loans, you start to pay interest as soon as you receive the money. When you take out a mortgage on a home, you start to pay interest with your first payment.
Student loans can be a little different. With most types of student loans, both federal and private, you’re not required to pay any principal or interest until you graduate, leave school, or drop below half-time enrollment. There may also be a grace period after that point before you need to start making payments. Federal loans typically have a six-month grace period, and some private loans offer grace periods as well.
However, with private loans and some types of federal student loans, interest begins to accrue as soon as the loan money is disbursed to your school. This interest builds up and is added into your loan amount once you leave school through a process known as capitalization.
When do I have to pay interest on subsidized loans?
Two main types of federal student loans for undergraduate students are available: subsidized and unsubsidized. The main difference lies in how interest is handled and who qualifies for the loans.
Subsidized loans are only available for students with financial need. If you qualify for these loans, the U.S. Department of Education pays your interest while you’re in school at least half-time and during the six-month grace period after that. This can save you a significant amount of money when it comes time to repay your loans.
Important information: You only become responsible for paying interest on subsidized loans once you begin repayment, following the grace period after you leave school, or if you drop below half-time enrollment.
Federal student loans typically have fixed interest rates that Congress sets each year. This means your rate won’t change for as long as you have the loan. The current interest rate on Direct Subsidized Loans is 4.99%.
The way you pay this interest will depend on the repayment plan you choose. Federal student loans come with several different plans, including:
- Standard Repayment Plan: With this plan, you repay your student loan in monthly payments over 10 years. The amount you pay stays the same over that entire period.
- Graduated Repayment Plan: Your monthly payments start out smaller, and then increase every two years. Ideally, your income would increase during this time as well, helping you make your payments. You’ll still pay the loan off within 10 years, and your monthly payment will never be less than the interest due on the loan.
- Extended Repayment Plan: This plan gives you more time to pay off the loan if you have a significant amount of debt — up to 25 years. This means your monthly payment will be lower, but you’ll end up paying much more in interest over the life of the loan.
- Income-based repayment plans: The federal government also offers four varieties of income-driven repayment plans, which set your monthly payment at a percentage of your monthly disposable income and household size. Because lower payments mean it takes longer to repay your loan, you’ll end up paying more in interest over the life of the loan. In some cases, your monthly payment under these plans won’t cover the interest that accrues on your loan. Depending on your specific plan, the government may pick up the extra interest or it may be capitalized into your loan.
Here are the types of income-driven repayment plans available:
|Repayment plan||Monthly payment||Term length
(time until forgiveness)
|Income-Based Repayment||10% or 15% of discretionary income|
(depending on when you took your loans out)
|Income-Contingent Repayment||20% of discretionary income|
(or what you'd pay on income-adjusted 12-year plan, if less)
|Up to 25 years|
|Pay-As-You-Earn||10% of discretionary income|
(never more than what you’d pay on standard repayment plan)
|Up to 20 years|
|Revised Pay-As-You-Earn||10% of discretionary income|
When do I have to pay interest on unsubsidized loans?
Unsubsidized federal loans are available to students without financial need. With these loans, you’re responsible for paying all the interest. Your loan begins accruing interest as soon as the money is disbursed to your school to pay for your tuition and other costs.
However, you don’t have to pay this interest right away.
Important information: You can defer all payments until after you leave school or drop below half-time enrollment. But if you choose this option, your interest will build and capitalize into your loan when you begin making payments — adding to the total amount you pay back. You may also choose to make interest-only payments while you’re in school to keep your costs down when you start repaying your loan.
Direct PLUS Loans work similarly. These loans are available to graduate and professional students, as well as parents of undergraduate students. Interest on these loans begin accruing when the loan is disbursed, though you’re not required to start making payments until you leave school or drop below half-time enrollment.
With unsubsidized loans, you typically have access to the same types of repayment plans as you would with subsidized loans.
Check Out: Federal Direct Unsubsidized Loans: Explained
When do private student loans begin accruing interest?
Just like unsubsidized federal loans, interest generally begins accruing on private loans as soon as the loan is paid out to your school. You may not have to make payments right away; many private lenders offer payment deferment while you’re in school, though you should check before signing for the loan.
Many private student lenders offer three repayment options.
- You make full principal and interest payments right away.
- You make interest-only payments while you’re in school to avoid that interest building up and adding to the amount you have to pay back.
- You choose complete deferment on payments until after you leave school. This plan typically ends up being the most expensive in the long run, though you don’t need to worry about payments while you’re taking classes.
Do student loans have grace periods?
Yes, many student loan types have grace periods. These are stretches of time after you graduate, leave school, or drop below half-time enrollment when you aren’t responsible for making payments. They’re intended to give you time to get a job or get on your feet financially before you need to start paying back the loan.
Here are the grace periods for a few common types of student loans:
|Loan type||Grace period (months)|
|Federal Direct Subsidized Loans||6|
|Federal Direct Unsubsidized Loans||6|
|Federal PLUS Loans||6|
|Federal Perkins Loans||9|
|Private student loans||6 to 9 months (depending on lender)|
With most types of student loans, interest continues to accrue during the grace period. The exception is subsidized loans, when the government pays the interest during the grace period.
How does interest work during deferment and forbearance?
During both deferment and forbearance periods, you aren’t required to make payments on your student loans. But interest may still accrue during this time, depending on the type of student loan you have.
Federal loan deferment
With federal loans, deferment can be granted under a few specific circumstances. The most common type of deferment is in-school deferment, which allows you to avoid paying on your student loans while taking classes. Other deferments include:
- Cancer treatment deferment
- Economic hardship deferment, which may apply if you’re receiving welfare benefits, making less than 150% of the poverty level, or serving in the Peace Corps
- Graduate fellowship deferment
- Military service deferment
- Unemployment deferment
- Rehabilitation deferment, if you’re in drug treatment or vocational programs
Federal loan forbearance
Federal student loan forbearance is slightly different. You can request a forbearance if you’re having trouble making your payments for any reason, and your student loan servicer may grant it. You qualify for mandatory forbearance if you are:
- Serving in AmeriCorps
- Working for the Department of Defense or National Guard
- Participating in a medical or dental residency program
- Under significant debt burden, meaning your loan payment is greater than 20% of your monthly income
Important information: Interest will accrue during forbearance, no matter what type of loan you have.
During the COVID-19 pandemic, the federal government moved interest rates on its student loans to 0% and suspended loan payments. That means that no interest accrued during that period. This suspension is slated to end on Aug. 31, 2022.
Private student loans often have similar deferment and forbearance programs to federal loans. Interest will generally accrue in all circumstances during deferment or forbearance.
Learn More: What Can You Use Student Loans For?
Are there tax benefits to student loan interest?
Yes, you may be able to deduct some of the money you pay in student loan interest on your federal taxes.
If you have federal loans, you can likely deduct up to $2,500 in interest you pay on your tax return. With private loans, you may be able to deduct up to $2,500 in interest as well, depending on your specific type of loan. Be sure to check with your loan servicer to see if your loan qualifies.
In either case, your student loan servicer will send you a Form 1098-E that details how much interest you paid over the course of the year.
How to save money on student loans
The interest rate on your student loan has a major effect on how much you ultimately pay. Even a slightly higher interest rate can equate to thousands of dollars in extra costs over the life of your loan.
Depending on your financial situation, you may be able to refinance your student loans into a new loan with a lower interest rate. This could reduce your monthly payment and lower the amount you pay in interest before your loan is paid off.
Private lenders offer student loan refinances . These allow you to combine multiple federal and private student loans into a single loan with one payment and interest rate. The interest rate you qualify for will depend on your finances and credit. The higher your credit score, the lower the interest rate you’ll typically qualify for. With excellent credit, the greater the chance that you’d be able to qualify for an interest rate significantly lower than you’re currently paying.
However, take caution before refinancing federal student loans into a new, private loan. By doing so, you lose access to the benefits that federal loans provide, including flexible repayment plans and student loan forgiveness programs. If you have poor credit, refinancing your loans is also not likely to yield you a good deal.
Check Out: 7 Ways to Lower Your Interest Rate Now
Other ways to save money on student loans
Other strategies to help you save money on student loans include:
- Only borrow what you need. The more you borrow, the more you’ll have to pay back and the more interest you’ll accrue.
- Explore scholarships and grants. Your school may offer financial aid, including scholarships and grants. This money doesn’t need to be paid back and reduces the amount you need to borrow. You may also qualify for work study, a program where you’re employed while in school and earn money to help pay for your higher education expenses.
- Make interest-only payments while in school. Even though you’re not required to, you can generally make interest-only payments while in school to avoid this interest being capitalized into your loan when you graduate.
- Set up automatic payments. Some student loan servicers will offer you a discount on your interest rate if you use an “autopay” feature, which deducts money for your student loan payment from your bank account automatically when it’s due.
If you’re interested in a private student loan, consider one of our partners.
The companies in the table below are Credible’s approved partner lenders. Whether you’re the borrower or cosigner, Credible makes it easy to compare rates from multiple private student loan providers without affecting your credit score.
|Lender||Fixed Rates From (APR)||Variable Rates From (APR)|
|3.75% - 13.72% APR9||3.37% - 13.72% APR9|
your credit score. 100% free!
Lowest APRs reflect autopay, loyalty, and interest-only repayment discounts where available | 1Citizens Disclosures | 2,3College Ave Disclosures | 7EDvestinU Disclosures | 8INvestEd Disclosures | 9Sallie Mae Disclosures