When Does Interest Start Accruing on Student Loans?

For most federal and private student loans, interest starts accruing as soon as the money is disbursed to your school to pay for your tuition and other costs. However, there are a few exceptions. This guide will cover when interest starts to accrue on all student loans, and give you strategies to help reduce your loan payment over time. 

When does interest start on student loans?

With private loans and most federal student loans, interest begins to accrue daily as soon as the loan money is sent to your school. This interest builds up and can later be added to your loan amount through a process known as capitalization.

There’s one exception to this rule: Direct Subsidized Loans. These federal loans are offered to students with financial need, and the government pays the interest for you while you’re in school and during other eligible periods of nonpayment. For these loans, you’ll start to repay the loan balance with interest after you leave school and finish the grace period. 

Here’s a look at when interest starts to accrue for each type of student loan: 

• Subsidized loans: Interest starts accruing after you leave school or drop below half-time enrollment, and after your six-month grace period ends. 
• Unsubsidized loans: Interest starts accruing as soon as the money is disbursed.
• Direct PLUS Loans: Interest starts accruing as soon as the money is disbursed. 
• Private student loans: Interest starts accruing as soon as the money is disbursed. 

Unsubsidized vs. subsidized loan interest 

Unsubsidized loans start accruing interest as soon as the funds are sent to your school. These loans continue to accrue interest while you’re in school and during your six-month grace period, but you don’t have to make any payments on these loans until your grace period ends. 

To help keep your costs down, consider making interest-only payments while you’re in school if possible. By paying off the interest as it accrues, your loan balance won't grow while you're enrolled in school. 

Note that interest on Direct PLUS Loans works similarly. These loans are available to graduate and professional students, as well as parents of undergraduates. 

The interest rates for the 2023-24 school year are:

• Direct Unsubsidized Loans (undergraduates): 5.50% 
• Direct Unsubsidized Loans (graduate and professional students): 7.05%
• Direct PLUS Loans: 8.05%

Subsidized loans, on the other hand, are only available to undergraduate 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, during the six-month grace period after you graduate, and in any eligible periods of deferment. This can save you a significant amount of money when it comes time to repay your loans.

You only become responsible for paying interest on subsidized loans during periods of active payment or forbearance. 

The 2023-24 interest rate on Direct Subsidized Loans is 5.50%. 

Private student loan interest 

Just like unsubsidized federal loans, interest generally begins accruing on private student 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, so 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 keep your loan balance from growing.
• You completely defer 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.

What happens during the grace period? 

Most student loans 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 start paying back the loan.

With most types of student loans, interest continues to accrue during the grace period. The exception is federal subsidized loans — the government pays the interest during the grace period on those debts.

Here are the grace periods for a few common types of student loans:

How does interest work during deferment and forbearance?

During both deferment and forbearance, 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 pause payments on your student loans while taking classes. 

During deferment, interest will generally accrue on your loan 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. If you have subsidized loans or federal Perkins Loans, interest won’t accrue during deferment.

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. Interest will accrue during forbearance, no matter what type of loan you have.

You qualify for mandatory forbearance if you are:

• Serving in an AmeriCorps position 
• 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 20% or more of your gross monthly income (for up to 3 years)

Private loan deferment and forbearance 

Private student loans often have similar deferment and forbearance programs to federal loans, but exact policies vary by lender. With private loans, interest will generally accrue in all circumstances during deferment or forbearance. Contact your loan servicer to explore your options. 

Strategies to save money

The interest rate on your student loans has a major effect on how much you’ll ultimately pay over the life of your loan. Here are some strategies to help reduce the cost of your student loans over time:

• Only borrow what you need: The more you borrow, the more you’ll have to pay back and the more interest you’ll accrue.
• Make interest-only payments while in school: Even though you’re not required to, you can make interest-only payments while in school to keep your debt from growing.
• Explore scholarships and grants: Your school may offer financial aid, including scholarships and grants. This money typically 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.
• Set up automatic payments: Most student loan servicers offer a discount on your interest rate if you use an “autopay” feature, which deducts money from your bank account for your student loan payment automatically when it’s due.
• See if refinancing is for you: Depending on your financial situation, you may be able to refinance your private 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.

Keep in mind, if you refinance federal student loans, you’ll lose access to federal benefits, such as flexible repayment plans and student loan forgiveness programs.

Learn More: How Your Student Debt Can Grow
 

Find Your Student Loan

Student loan interest FAQ

Can you pay off student loans early to avoid interest?

You can pay off student loans early to reduce the amount of interest you pay over the life of your loan. By making extra payments or paying more than the required minimum each month, you can reduce the principal balance on your loan, which in turn decreases the amount of interest that accrues. 

What is interest capitalization on student loans?

Interest capitalization on student loans happens when the unpaid interest on a loan accrues and is added to the principal loan balance. In other words, the interest becomes part of the principal, and from that point forward, interest will be calculated based on the new, higher principal balance. This can increase the overall cost of your loan, since you’re paying interest on the capitalized interest as well.

How do I stop my student loan interest from accruing?

For federal subsidized and unsubsidized loan borrowers, the SAVE plan can help prevent your loan balance from growing due to unpaid interest. When you make your full monthly payments on time, the government will cover any unpaid interest that accrued since your last payment. 

Does student loan interest accrue daily or monthly? 

Interest on student loans typically begins accruing daily starting the day your loans are disbursed. 

Are there tax benefits to student loan interest?

For those who qualify, student loan interest is tax deductible. If you have federal loans, you may be eligible to deduct up to $2,500 in interest you paid during the year 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 loan type. Be sure to check with your loan servicer to see if your loan qualifies.