How Does Student Loan Interest Work While You’re in School?

October 13, 2021 · 6 minute read

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How Does Student Loan Interest Work While You’re in School?

Understanding all the rules involved with student loan interest accrual is crucial. Interest on many student loans accrues while you are in school. The main exception to this is for Federal Direct Unsubsidized Loans. The interest on these loans is covered by the U.S. government while the student is still taking classes.

That said, it’s important to identify exactly which type of student loan you have so you’re fully aware of the terms for that loan. One of the main divides when it comes to student loans is the divide between federal and private.

Understanding How Federal Student Loan Interest Works

The first step of understanding how student loan interest works is to know what type of student loan you have exactly, because interest may accrue differently, depending on the type of loan it is.

Subsidized vs. Unsubsidized Loans

Federal student loans may be subsidized or unsubsidized. The accrued interest on Direct Subsidized loans is covered by the government while a student is enrolled at least half-time. Direct Subsidized loans are only available to undergraduate students.

For Direct Unsubsidized Loans, students are responsible for paying the interest that accrues on their student loans. Interest begins accruing as soon as the loan is disbursed, or paid out to the borrower.

You won’t be required to make payments while in-school, but if you don’t, you may graduate with a higher balance than when you started. That’s because the accrued interest is capitalized on the original balance of the loan. Direct Unsubsidized Loans are available to undergraduate and graduate students.

Direct PLUS Loans are available for graduate students or their parents. The interest on these loans begins accruing when the loan is disbursed and continues accruing while the student is enrolled in school.

How Does the Grace Period Impact Interest Accrual?

Both Direct Unsubsidized and Subsidized Loans have a six month grace period after the borrower graduates. On subsidized loans, the borrower is not responsible for paying interest during the grace period. On an unsubsidized loan, interest continues to accrue during the six month grace period.

Direct PLUS Loans do not have a grace period. Graduate students do receive an automatic deferment after graduation and interest does accrue during this time period.

How Does Capitalized Interest Work?

While payments are not required on most federal student loans while the student is enrolled in school, students with Direct Unsubsidized or PLUS loans have the option of making interest-only payments. This can be helpful because, as mentioned previously, after the grace period, and at the end of periods of deferment or forbearance, the accrued interest is capitalized on the loan.

Capitalized interest occurs when the accrued interest is added to the principal balance of the loan (the amount that was originally borrowed). This becomes the new balance of the loan, and interest will continue to accrue based on that new balance.

Recommended: Understanding Capitalized Interest on Student Loans

Think of all that accumulating interest like a snowball rolling down a mountain. You might be able to stay ahead of it for a while, but it also might catch up with you.

Understanding How Private Student Loan Interest Works

Private student loans are not subject to the same rules as federal student loans. They’re offered by private companies, and each lender will likely have it’s own terms and conditions.

The majority of private student loans will accrue interest while the student is enrolled in school. Some lenders may allow borrowers to defer payments until after they graduate. In this case, the accrued interest from while the borrower was in school will likely be capitalized on the loan. To be sure of the terms on your loan, review the loan agreement or check in with the lender directly.

Recommended: Private vs Federal Student Loans

Keep in mind that, as mentioned, private student loans don’t always offer the same benefits or borrower protections (things like income-driven repayment options) that federal loans do. Because of this, they are generally considered after all other sources of financing, including federal student loans, have been exhausted.

This table provides an overview of how interest accrues on the various types of loans discussed in this article.

Type of Loan

Does Interest Accrue While In School?

Grace Period and Interest

Federal Direct Subsidized Loans Interest does not accrue while the borrower is enrolled in school at least half-time Interest does not accrue during the six month grace period
Federal Direct Unsubsidized Loans Interest accrues while the borrower is in school Interest does accrue during the six month grace period
Federal Direct PLUS Loans Interest accrues while the borrower is in school Do not have a grace period
Private Student Loans Varies by lender. It is likely that interest will accrue Varies by lender. Some lenders may offer a grace period and interest may accrue

Can You Minimize Student Loan Interest Accrual While in School?

One way to limit accrued interest is to limit what you borrow in the first place. When it comes to student loans, aim to borrow only what you really need.

Work-Study or a Part-Time Job

A work-study, for those eligible, or part-time job in another way to help take the sting out of student loan payments. You may have the best intentions when it comes to getting a job to help make those loan payments, but it can be tough to manage when you’re busy with academics, extracurriculars, internships and more.

Make Interest Only Payments

As mentioned earlier, many loans allow borrowers to make interest-only payments while they’re in school. While this won’t really eliminate accrued interest, it may help minimize the amount of interest paid over the life of the loan, because the interest is paid as it accrues instead of being capitalized onto the loan.

The Takeaway

Interest on many types of student loans accrues while the student is in school. Federal Direct Subsidized Loans are an exception, as the accrued interest is paid for by the government while the student is enrolled in school and during the grace period.

Generally speaking, interest other types of student loans, including Direct Unsubsidized and PLUS Loans, begin accruing interest when they are disbursed, and continue accruing interest while the student is enrolled. For private student loans, each lender will likely have its own terms and conditions. The surest way to confirm how interest accrues on a private student loan is to check directly with the lender.

Depending on your situation, student loan refinancing can also lower your monthly payment. Many online lenders consider a variety of factors when determining your eligibility and loan terms, however, including your educational background, earning potential, credit score, and other factors.

Students interested in borrowing a private student loan to help pay for college may want to consider SoFi. Student loans are available for undergraduate and graduate students and their parents. As mentioned above, private student loans don’t always offer the same benefits as federal student loans.

Undergraduate student loans at SoFi do offer a six month grace period where students can defer payments after they graduate (though interest will likely continue to accrue). And all private student loans at SoFi have absolutely no fees.

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