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When Does Interest Accrue on Student Loans?

When Does Interest Accrue on Student Loans?
Melanie Lockert
Melanie LockertUpdated August 3, 2023
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If you’ve taken out student loans, it’s a good idea to know when interest starts accruing on student loans. That way, you can have a better understanding of exactly when and how quickly your debt might be growing.The truth is, interest begins to gather on most federal student loans and private student loans once the funds are disbursed. As a borrower, how much you pay in interest and when you pay the interest can vary based on the type of loans you took out. Here, you’ll learn about this topic in depth, including: 
  • What is interest on student loans?
  • When does interest accrue on the different kinds of student loans?
  • How does deferment and forbearance affect the interest on student loans?
  • What are some ways to lower student loan payments?

What Is Interest on Student Loans?

When you take out any type of loan — including student loans — you’re charged interest as part of the lending process. Think of interest as an expense or fee that borrowers pay to access funds from a lender. Student loans allow borrowers to pay for education costs now and pay the loans back later, typically after a six-month grace period, with interest. But when does interest start on student loans? Here are some facts to know:
  • Student loans accrue interest on a daily basis, which can add to the total cost of the loan. How much interest accrues is based on the interest rate. 
  • Federal loans have fixed rates, meaning they remain the same throughout the term of the loan. Private loans may have either fixed rates or variable rates that can vary over time. 
  • Though federal loans have fixed interest rates, the rates differ among types of loans and whether the loan is for undergraduate studies or graduate studies. 
Wondering what interest rates on federal loans might look like? Here are current federal loan rates for 2023-2024:
  • Direct Subsidized and Unsubsidized Loans for undergraduate students is 5.50%
  • Direct Unsubsidized Loans for graduate students is 7.05%
  • Direct PLUS Loans for graduate students or parents is 8.05%
While interest accrues on most federal loans and private loans upon disbursement, borrowers who qualify for Direct Subsidized Loans get some support from the federal government. The federal government pays the interest on these types of loans during three critical periods of time. This includes the period of time you’re attending school, the duration of your grace period, plus periods of deferment. In other words, this type of loan won’t accrue interest until you begin repaying a student loan. This feature could save you money over the total cost of the loan. To be eligible for Direct Subsidized Loans, a borrower must be pursuing their undergraduate education and demonstrate financial need. Borrowers are responsible for the interest on other types of federal loans, as well as private loans. Since they accrue interest immediately upon disbursement, including while in school, the interest can be added to the loan (this is also referred to as when student loan interest is capitalized), making it more costly.  

When Interest Starts Accruing for Private Student Loans

You may wonder, When do student loans start accruing interest? It’s an important question since interest adds to your repayment costs. So know that the interest you pay when taking out private student loans starts to accrue upon disbursement. In other words, once the private loans are sent to your school or to you as the borrower, the interest will kick in and start to grow. So if you’ve been wondering when student loans start accruing interest, it’s right away. Private loans are available through online lenders, banks, and credit unions. The rate that you are approved for depends on numerous factors, including your credit score. You may be able to choose either a variable rate or fixed rate with a private lender. That interest rate will affect how much you pay throughout your student loan repayment. Recommended: How Do I Find My Student Loan Lender? 

When Interest Starts Accruing for Unsubsidized Student Loans

When does student loan interest start federal student loans; specifically, for unsubsidized loans? As soon as these loans are disbursed, the interest starts to add up. These types of loans can be taken out by undergraduate students as well as graduate students, plus there are no eligibility requirements around financial need. And, as mentioned above, unsubsidized loans start to accrue interest immediately.While these loans can expand access for some students, keep in mind that they don’t offer the same benefits as subsidized loans. Namely, the fact that the interest on subsidized loans is paid by the federal government during your time in school as well as your grace period. Borrowers are responsible for the interest that builds up on unsubsidized loans during all periods of time. So if you’ve been curious about when federal student loan interest starts, it can vary by loan. 

When Interest Starts Accruing for Subsidized Loans

When comparing subsidized vs. unsubsidized student loans, you may wonder when student loan interest starts for subsidized loans. The interest on subsidized loans starts accruing interest for the borrower during repayment, after the six-month grace period. Given the name, these types of loans are subsidized by the federal government. The government pays the growing interest while you’re attending school as well as the six months after, typically referred to as your grace period. 

How Deferment Affects Student Loan Interest 

Deferment is a temporary pause on your student loan payments granted by your loan servicer. Whether interest accrues on your student loans during periods of deferment, depends on the specific loans. 
  • Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, plus any subsidized part of a Consolidation Loan don’t accrue interest while in deferment. 
  • Direct Unsubsidized Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans, and the Unsubsidized part of a Consolidation Loan do accrue interest during deferment, which the borrower is responsible for paying. 
If your federal loans do accrue interest during this time, you may be able to pay the interest while full payments are on hold or have the interest added — or capitalized — to your principal balance when payments resume. It should be noted that interest doesn’t capitalize for Federal Perkins Loans borrowers. Recommended: Student Loan Deferment Guide

How Forbearance Affects Student Loan Interest 

Student loan forbearance differs from deferment in terms of interest charges. In most cases, borrowers are responsible for the interest that accrues during the postponement of student loan payments. One notable exception is the Covid-19 forbearance, where interest rates are 0%.Under new rules and regulations, interest capitalization will no longer occur when a federal student loan borrower first enters repayment or leaves a forbearance. That new rule took effect on July 1, 2023, according to the U.S. Department of Education.After a three-year payment pause, the Covid-19 forbearance is set to end on Aug. 30, 2023. As a result, interest accrual on federal student loans will resume on Sept. 1, and payments will be due starting in October 2023.Recommended: When to Start Repaying Student Loans

Tips for Lowering Student Loan Payments

“When does interest start on student loans?” is a common question, and now you know most student loans begin to accrue interest on a daily basis. Because of that, the total balance can grow rapidly, making it difficult to pay back. Borrowers who would benefit from lower student loan payments can take advantage of various strategies, including the following. 

Refinancing Student Loans

Federal student loans come with fixed rates. That means they don’t change and will remain the same percentage during your repayment. A lower interest rate may be possible through refinancing student loans. A refinancing lender may be able to offer creditworthy borrowers a more attractive rate. Lower interest rates may end up reducing the total cost of the loan. Refinancing may make sense for certain borrowers, but there are some important caveats to consider. Refinancing is taking out a private loan to pay off your current loan often to get a competitive rate. If you have federal loans, however, it’s important to be aware of one impact of refinancing. If you pay them off and take out a private loan, that means you can no longer access certain benefits such as student loan forgiveness, forbearance, or income-driven repayment (IDR) plans. Though you may be able to save money on interest with a lower interest rate, compare refinancing student loans advantages and disadvantages and recognize the long-term impact of not being eligible for forgiveness or certain repayment plans. 

Income-Based Repayment Plans

The U.S. Department of Education offers the following four income-driven repayment (IDR) plans to help borrowers pay down their federal student loan debt:Private student loans are not eligible for any federal repayment options, including IDR plans. Depending on your income and family size, all four IDR plans may offer a lower monthly payment compared with the Standard Repayment Plan.All IDR plans can end with a borrower’s outstanding balance being forgiven at the end of the repayment period. Forgiveness may come after 20 or 25 years under any of the IDR plans, but forgiveness may come earlier for some SAVE Plan enrollees.Borrowers with original principal balances of $12,000 or less may be eligible for forgiveness of any remaining balance after making 10 years of payments under the SAVE Plan, according to the Federal Student Aid Office.Talk to your loan servicer about an IDR plan if you’re interested in a longer repayment window and monthly payments capped at 5% to 20% of your discretionary income. Understand, however, that on an IDR plan, more interest may accumulate over time while you enjoy lower payments.Recommended: Credit Score Needed to Refinance Student Loans: Here’s What You Should to Know

Student Loan Consolidation

Federal loan borrowers with various types of federal loans and multiple payments may choose a Direct Consolidation Loan to simplify monthly payments. A Direct Consolidation Loan consolidates all of your federal loans, so you only have one payment. It’s also possible that your payment is lowered when you consolidate student loans, due to a longer repayment term of 30 years. This may make repaying a student loan more affordable in the short term but costlier in the long term because of the added interest. Two major points to be aware of: Any interest you have now will be added to your principal balance, and, if you’re on an IDR plan and hoping for forgiveness, you’ll lose out on credit for your previously eligible payments. 

Compare Student Loan Refinancing Rates

Student loan interest can add up over the life of the loan. If you’d like to minimize how much you pay on your student loans, you can look into refinancing student loans. To refinance student loans, compare multiple lenders and student loan refinancing rates to find the best fit for you. Lantern can help you do this, quickly and conveniently. You can review student loan refinancing rates and offers from leading lenders. See how simple refinancing your student loans can be with Lantern!

Frequently Asked Questions

Does interest start accruing on student loans immediately?
Do student loans accrue interest while you are in school?
Do student loans accrue interest during student loan forbearance or deferment?
Photo credit: iStock/Brothers91

About the Author

Melanie Lockert

Melanie Lockert

Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, VICE, Allure, and more.
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