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If you are struggling to make payments on a personal loan and the loan goes into default, there can be negative consequences like damage to your credit score, having the loan turned over to a collection agency, and legal repercussions. Learn more about this situation and what your options are.

What Does It Mean to Default on a Personal Loan?

Just as with a mortgage or student loans, defaulting on a personal loan means you’ve stopped making payments according to the loan’s terms. You might be just one payment behind, or you may have missed a few. The point at which delinquency becomes default with a personal loan — and the consequences — may vary depending on the type of loan you have, the lender, and the loan agreement you signed.

How Does Loan Default Work?

Even if you miss just one payment on a personal loan, you might be charged a late fee. Your loan agreement should have information about when this penalty fee kicks in — it might be one day or a couple of weeks — and whether it will be a flat fee or a percentage of your monthly payment.

The agreement also should tell you when the lender will get more serious about collecting its money. Because the collections process can be costly for lenders, it might be a month or more before yours determines your loan is in default. But at some point, you can expect the lender to take action to recover what they’re owed.

What Are the Consequences of Defaulting on a Personal Loan?

Besides those nasty late fees, which can pile up fast, and the increasing stress of fretting about a debt, here are some other significant consequences to consider:

Damage to Your Credit

Lenders typically report missing payments to the credit bureaus when borrowers are more than 30 days late. This means your delinquency will likely show up on your credit reports and could cause your credit scores to go down. Even if you catch up down the road, those late payments can stay on your credit reports for up to seven years.

If you actually default and the debt is sold to a collection agency, it could then show up as a separate account on your credit reports and do even more damage to your credit scores.

Though you may not feel the effects of a lower credit score immediately, it could become a problem the next time you apply for new credit — whether that’s for a credit card, car loan, or mortgage loan. It could even be an issue when you try to rent an apartment or need to open new accounts with your local utilities.

Sometimes, a lender may still approve a new loan for borrowers with substandard credit scores, but it might be at a higher interest rate. This means you’d pay back more interest over the life of the loan, which could set you back even further as you work toward financial wellness.

Dealing with Debt Collectors

If you have a secured personal loan, the lender may decide to seize the collateral you put up when you got the loan (your car, personal savings, or some other asset). If it’s an unsecured personal loan, the lender could come looking for payment, either by working through its in-house collection department or by turning your debt over to a third-party collection agency.

Even under the best conditions, dealing with a debt collector can be unpleasant, so it’s best to avoid getting to that stage if you can. But if you fall far enough behind to be contacted by a debt collector, you should be prepared for some aggressive behavior on the part of the collection agency. These agents may have monthly goals they must meet, and they could be hoping you’ll pay up just to make them go away.

There are consumer protections in place through the Fair Debt Collection Practices Act that clarify how far third-party debt collectors can go in trying to recover a debt. There are limits, for example, on when and how often a debt collector can call someone. And debt collectors aren’t allowed to use obscene or threatening language. If you feel a debt collector has gone too far, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

You Could Be Sued

If at some point the lender or collection agency decides you simply aren’t going to repay the money you owe on a personal loan, you eventually could end up in court. And if the judgment goes against you, the consequences could be wage garnishment or, possibly, the court could place a lien on your property.

The thought of going to court may be intimidating, but failing to appear at a hearing can end up in an automatic judgment against you. It’s important to show up and to be prepared to state your case.

A Cosigner Could Be Affected

If you have a co-applicant or cosigner on your personal loan, they, too, could be affected if you default.

When someone cosigns on a loan with you, it means that person is equally responsible for paying back the amount you borrowed. So if a parent or grandparent cosigned on your personal loan to help you qualify, and the loan goes into default, the lender — and debt collectors — may contact both you and your loved one about making payments. And your cosigner’s credit score also could take a hit.

Is There a Way to Avoid Defaulting on a Loan?

If you’re worried about making payments and you think you’re getting close to defaulting — but you aren’t there yet — there may be some things you can do to try to avoid it.

Reassessing Your Budget

Could you maybe squeak by and meet all your monthly obligations if you temporarily eliminated some expenses? Perhaps you could put off buying a new car for a bit longer than planned. Or you might be able to cut down on some discretionary expenses, such as dining out and/or subscription services.

This process may be a bit painful, but you can always revisit your budget when you get on track financially. And you may even find there are things you don’t miss at all.

Talking to Your Lender

If you’re open about your financial issues, your lender may be willing to work out a modified payment plan that could help you avoid default. Some lenders offer short-term deferment plans that allow borrowers to take a temporary break from monthly payments if they agree to a longer loan term.

You won’t be the first person who’s contacted them to say, “I can’t pay my personal loan.” The lender likely has a few options to consider — especially if you haven’t waited too long. The important thing here is to be clear on how the new payment plan might affect the big picture. Some questions to ask the lender might include: “Will this change increase the overall cost of the loan?” and “What will the change do to my credit scores?”

Getting a New Personal Loan

If your credit is still in good shape, you could decide to get proactive by looking into refinancing the personal loan with a new one that has terms that are more manageable with your current financial situation. However, be sure to factor in any fees (such as origination fees on the new loan and/or a prepayment penalty on the old loan) to make sure the refinance will save you money. You’ll also want to keep in mind that extending the term of the term of your loan can increase the cost of the loan over time.

You can use an online personal loan calculator to see how much interest you might be able to save by paying off your existing debt with a loan.

Or you might consider combining the old loan and other debts into one debt consolidation loan with a more manageable payment. This strategy would be part of an overall plan to get on firmer financial footing, of course. Otherwise, you could end up in trouble all over again.

But if your income is higher now and/or your credit scores are stronger than they were when you got the original personal loan, you could potentially improve your interest rate or other loan terms. (Personal loan requirements vary by lender.) Or you might be able to get a fresh start with a longer loan term that could potentially lower your payments.

If you decide a new personal loan is right for your needs, the next step is to choose the right lender for you. Some questions to ask lenders might include:

•   Can I borrow enough for what I need?

•   What is the best interest rate I can get?

•   Can I get a better rate if I sign up for automatic payments?

•   Do you charge any loan fees or penalties?

•   What happens if I can’t pay my personal loan because I lost my job? Do you offer unemployment protection?

Is There a Way Out of Personal Loan Default?

Even if it’s too late to avoid default, there are steps you may be able to take to help yourself get back on track. After carefully evaluating the situation, you may decide you want to propose a repayment plan or lump-sum settlement to the lender or collection agency. If so, the CFPB recommends being realistic about what you can afford, so you can stick to the plan.

If you need help figuring out how to make it work, the CFPB says, consulting with a credit counselor may help. These trained professionals can work with you to come up with a debt management plan. While a counselor usually doesn’t negotiate a reduction in the debts you owe, they might be able to help get your interest rates lowered or have loan terms extended, which could lower your monthly payments.

What’s more, a credit counselor can also help you create a budget, advise you on managing your debts and money, and may even often offer free financial education workshops and resources.

But consumers should be cautious about companies that claim they can renegotiate, settle, or change the terms of your debt. The CFPB warns that some companies promise more than they can deliver. If you’re interested in exploring credit counseling, a good place to start is browsing this list of nonprofit agencies that have been certified by the Justice Department.

Finally, as you make your way back to financial wellness, it can be a good idea to keep an eye on two things:

1. The Statute of Limitations

For most states, the statute of limitations — the period during which you can be sued to recover your debt — is about three to six years. If you haven’t made a payment for close to that amount of time — or longer — you may want to consult a debt attorney to determine your next steps. (Low-income borrowers may even be able to get free legal help.)

2. Your Credit Score

Tracking your credit reports — and seeing first-hand what builds or hurts your credit scores — could provide extra incentive to keep working toward a healthier financial future. You can use a credit monitoring service to stay up to date, or you could take a DIY approach and check your credit reports yourself. Every U.S. consumer is entitled to free credit reports available at AnnualCreditReport.com, which is a federally authorized source.

The Takeaway

If you default on a personal loan, there can be various negative impacts, such as a lower credit score, owing fees, and having your debt turned over to a collection agency. If you’re struggling to make payments, you might proactively talk to your current lender about modified payment terms — or it might be time to consider a new personal loan to consolidate high-interest debt.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How bad is it to default on a personal loan?

When a loan goes into default, it can trigger fees, damage your credit score, and stay on your credit report for up to seven years. You could face legal action as well. These negative consequences can mean it’s harder to qualify for new credit or do so at a favorable rate.

What happens if I don’t pay back a personal loan?

While the exact consequences will vary depending on your loan and your lender, typically, when you don’t pay back a personal loan, your credit score will be negatively impacted, you may face collection efforts from an agency or the lender, and you could also face legal action.

Is it a crime to default on a loan?

It isn’t a crime to default on a loan. You cannot be arrested. However, you could face legal action and have to appear in court in connection with the non-payment of the debt.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q325-046

A pass/fail grading system allows a student to receive either a grade of “P” (pass) or “F” (fail) for a particular class instead of the usual letter grading system. Many colleges offer this option in order to encourage students to explore new academic areas without having to worry about it affecting their transcripts.

However, the pass/fail grading system comes with some limitations, including restrictions on which and how many classes you can take pass/fail each year. And, in some cases, taking a class pass/fail can still have an impact on your academic record.

Read on to learn exactly what pass/fail means, what a passing (and failing) grade is, and when to consider a pass/fail option.

How Pass/Fail Grading Works

The traditional grading system was initially established centuries ago by English universities like Oxford and Cambridge as a way of encouraging students to work harder. While letter grades may still be the dominant system in American universities, some schools have deviated from this structure, establishing their own ways of evaluating students largely based on the pass/fail system.

Reed College in Portland, Oregon has a unique style of grading that encourages students to “focus on learning, not on grades.” While students are still assigned grades for each course, these grades are not distributed to students. Instead, students are given lengthy comments and reports on their academic performance. Reed does not have a dean’s list or honor roll either.

At Brown University, students can take an unlimited number of classes “satisfactory/no credit (S/NC),” and GPAs are not calculated. They also do not name students to a dean’s list.

Some schools, including Swarthmore College and MIT, have students take all classes pass/fail in the first semester of their freshman years. Swarthmore’s policy is meant to encourage students to stretch themselves and take risks, and is aligned with their policy of collaboration as opposed to competition with classmates. MIT’s policy is designed to help students adjust to increased workloads and variations in academic preparation and teaching methods.

In both cases, taking the emphasis off grades is meant to improve students’ experiences of higher education, helping them to take full advantage of their time on campus.

Of course, most schools emphasize letter grades more than Brown and Reed, as it allows them to distinguish high achievers and highlight specific areas where students excel or may need to improve.

It’s common, however, for colleges to allow students to take one class pass/fail per semester. Typically, this is only offered for elective (not core) classes. Often, a grade of “P” is equal to a grade of D- or higher, but has no impact on the student’s overall grade point average. A grade of “F,” however, will usually have the same effect on the grade point average as a traditional failure.


💡 Quick Tip: Private student loans offer fixed or variable interest rates. So you can get a loan that fits your budget.

What Are the Benefits of Pass/Fail?

While college can be a rewarding and stimulating time for students, it also has its challenges, including constant pressure to keep up your grades. The beauty of taking a class pass/fail is the sense of freedom it gives you — once the stress of getting a perfect grade is removed, you are at liberty to fully embrace the kind of intellectual curiosity that should be at the heart of a college experience.

Maybe you’re a pre-med student and want to take a painting class, or perhaps you’re majoring in sociology and want to dabble in art history. These options can lead you down unexpected paths, opening creative doors you might have avoided if you were solely focusing on your GPA.

Recommended: How Grades Affect Your Student Loans

The Limits to Pass/Fail

The pass/fail system also has some potential downsides. One is that should you end up doing really well in the class, you generally can’t change your mind and ask to take the class for a grade rather than pass/fail. By the same token, if you do poorly in a class, you can’t make a belated request for a pass/fail.

In addition, pass/fail grades generally don’t count toward a major or minor, which limits your options when deciding whether or not to go this route.

While it’s hard to know for sure, some students feel that taking a higher number of pass/fail classes could reflect poorly on their college academic record and be a strike against them when applying for a job or to graduate school. However, it’s also possible that a potential employer or an admissions officer might be impressed by a student’s breadth of study and sense of initiative in studying “outside the box.”


💡 Quick Tip: Master’s degree or graduate certificate? Private or federal student loans can smooth the path to either goal.

The Takeaway

Taking a few of your classes pass/fail can be a great way to explore new academic areas of interest during college, and is unlikely to adversely impact your post-grad opportunities, including summer internships, employment, and graduate school.

Whether you take a class pass/fail or for a letter grade won’t have any impact on how many credits you get from the course — or the cost of tuition. If you’re concerned about how you’ll cover the cost of your education, keep in mind that you have a range of options — including savings, scholarships, grants, work-study programs, and federal or private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

How does pass/fail grading work?

Pass/fail grading simplifies academic evaluation by assigning a “pass” for satisfactory performance and a “fail” for unsatisfactory performance, typically without letter grades. It reduces pressure and allows students to explore subjects without impacting their GPA.

Does pass/fail hurt your GPA?

Pass/fail courses generally do not affect your GPA. A “pass” does not add points, and a “fail” may or may not lower it, depending on the institution’s policy. Check your school’s guidelines for specific details.

Does a pass/fail class look bad?

Pass/fail courses typically don’t impact your GPA. A “pass” doesn’t add points, while a “fail” might or might not lower it, depending on your school’s policy. Always check your institution’s guidelines for clarity.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOISL-Q325-045

Millions of students have earned a GED diploma and gone on to get a college degree. In fact, 98% percent of colleges accept the GED credential just as they would a high school diploma.

Some competitive schools and programs, however, require a certain minimum GED test score for admission, and possibly other tests and requirements. Here’s what you need to know to get into college with a GED.

What Is a GED Diploma?

A GED diploma is an alternative to a high school diploma for students who didn’t complete the requirements to graduate from high school. To earn a GED, you need to take a series of tests that will indicate whether or not you have a high school level of education. This is known as the GED (or General Educational Development) test.

The test covers four subject areas: Social Studies, Science, Mathematical Reasoning, and Reasoning Through Language Arts. Each test is administered separately (so you can space them out), timed, and covers several topics in the subject area.

•   Social Studies (70 minutes):

◦  Reading for Meaning in Social Studies

◦  Analyzing Historical Events and Arguments in Social Studies

◦  Using Numbers and Graphs in Social Studies

•   Science (90 minutes):

◦  Reading for Meaning in Science

◦  Designing and Interpreting Science Experiments

◦  Using Numbers and Graphics in Science

•   Mathematical Reasoning (115 minutes):

◦  Basic Math

◦  Geometry

◦  Basic Algebra

◦  Graphs and Functions

•   Reasoning Through Language Arts (150 minutes):

◦  Reading for Meaning

◦  Identifying and Creating Arguments

◦  Grammar and Language


💡 Quick Tip: SoFi offers low fixed- or variable-interest rates. So you can get a private student loan that fits your budget.

Preparing for and Taking the GED Test

The first step to getting your GED is to create an account on GED.com. Once you have an account, you’ll be able to access free study guides and practice tests, register for low-cost online and in-person prep classes, and purchase a voucher for the official GED Ready practice test.

You can register to take the GED test online or at a local test center through your GED account. Some states require that you take the GED practice test to register for the official GED test in-person or online. You can look up your state’s requirements here.

Each of the four tests is taken and scored separately, and there are three scoring levels.

•   GED Passing Score: Scoring a 145 on each test subject is a passing score, the minimum needed to obtain a GED diploma.

•   GED College Ready Score Level: Scoring between 165 and 174 on each test subject indicates a readiness for college-level coursework.

•   GED College Ready + Credit Score Level: Scoring between 175 and 200 indicates not only a readiness for college-level coursework, but possible eligibility for college credit, depending on the college program.

Test scores are typically available in your GED.com account within 24 hours of taking the test, though it can sometimes take up to three business days. The scoring section of your account will also include a detailed report of each subject test’s score and skills you can work on to improve their score.

Can You Go to College With a GED?

Absolutely! Nearly all colleges accept a GED diploma in lieu of a high school diploma. These include community colleges, vocational schools, private universities, and public universities. In some cases, however, you may need to meet a few specific requirements, or take a few extra steps, in order to be admitted with a GED.

Certain colleges, for example, may require a GED grad to show they’re ready for college-level courses either by submitting a high enough ACT or SAT score to the college or by taking the college’s placement test. The placement test score will be a factor in the admissions process.

Recommended: College Application Checklist

How to Get Into College With a GED: Step-by-Step

While most colleges and universities accept the GED diploma, this diploma can sometimes be perceived as less challenging than a high school diploma. As a GED student, you may also lack other things colleges might be looking for, such as transcripts that show academic performance or class rank.

Fortunately, there are a number of steps GED grads can take to increase their chances of getting accepted to college.

Check the School’s Admission Requirements

Some schools and competitive programs require students to have a minimum GED test score or some prior college credit to be considered for admission. Other institutions require applicants who hold a GED diploma to take additional placement tests. There is also a small percentage of schools that do not accept the GED diploma at all.

You can learn about requirements on a school’s website. If you can’t find enough information online, you can always call the school’s admissions office. The admissions staff can be a great source of accurate and up-to-date information on general admission policies, as well as standards pertaining to GEDs, such as getting credit for a College Ready+ score.

Consider Taking the SAT or ACT

Many colleges are test-optional now, which means students don’t have to submit SAT or ACT scores along with their applications. However, If you take one of these entrance exams — and get a higher-than-average-score — you could potentially increase your chances of getting in. Some schools (even those that don’t require the ACT or SAT) also use these test scores for class placement or scholarships.

The SAT scores range from 400 to 1600, and the national average is 1024. The ACT scores range between 1 and 36, and the average is around 19.4.

Write a Compelling Essay

The college admissions essay gives GED grads an opportunity to shine. Telling a personal story, perhaps about challenges that you have overcome or ways in which you have persevered, or describing how a volunteer activity has made an impact on your life, might be the thing that makes your application stand out against a stack of others.

Include Activities on Your Application

If you participated in extracurricular activities while you were in high school or volunteered with a community organization, putting that information on your college application can give the admissions team a fuller view of who you are as a person (instead of just looking at your test scores). You may also want to include any jobs you’ve had that are related to the field you want to study.

Recommended: 5 Ways to Start Preparing for College

Get Letters of Recommendation

Some colleges require two or three letters of recommendation. Even if a letter of recommendation is optional, including one can help your application stand out. A highly positive letter gives the admissions team insights into your character, while also showing that someone is willing to vouch for you. Good sources include former coaches, teachers, school counselors, supervisors, local leaders, and mentors.

Apply to Multiple Schools

A common — and recommended — strategy for all students is to apply to more than one school. Even if your goal is to attend a four-year college, you may want to include a local community college on your list. Community colleges often have open enrollment, which means that they don’t require the ACT or SAT tests. And, if you don’t get into colleges of your choice this go around, you might opt to get an associate degree at a community college, then transfer to a four-year college to complete your bachelor’s degree.

Recommended: How to Qualify for a College Application Fee Waiver

Explore Scholarships and Financial Aid

Scholarships and other financial aid packages can reduce the cost of getting a college education. The first step is to fill out the Free Application for Federal Student Aid (FAFSA®). This allows you to find out if you’re eligible for federal aid, such as grants, work-study opportunities, and federal student loans. You can also qualify for state-level and school-based aid through the FAFSA form.

In addition, you may want to explore private scholarships opportunities using a database like Fastweb or SoFi’s Scholarship Search Tool. Your school’s financial aid office might know about more resources available, too.

If you need to borrow to pay for college, it’s generally a good idea to take out federal student loans before private ones. Federal loans have benefits that private loans don’t, including access to income-driven repayment plans and loan forgiveness programs.


💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized Loans first disbursed from Oct. 1, 2020, through Oct. 1, 2026). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

The Takeaway

Just because you didn’t finish high school, doesn’t mean you can’t go to college. By getting your GED diploma, you can apply to virtually any type of secondary school, including community colleges and four-year universities.

To improve your odds of getting into college, you’ll want to make sure you meet all of the school’s admissions requirements, take any necessary entrance or placement tests, and put together a strong application that includes a great essay and personal recommendations.

To make going to college affordable, it can also be a good idea to start researching ways to cover the cost of your education. Options include savings, scholarships, grants, work-study programs, and federal or private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

Is it harder to go to college with a GED?

Having a GED doesn’t make it inherently harder to go to college, but it might require additional steps like taking placement tests or completing preparatory courses. Many colleges accept GEDs, but policies vary, so it’s important to check each institution’s requirements.

What score do you need on the GED to get into college?

Most colleges require a GED score of at least 145 on each of the four test subjects to meet their admission standards. However, some competitive schools may require higher scores.

What is the acceptance rate for college with a GED?

On average, the college acceptance rate for GED holders is nearly 98%. Some community colleges have open enrollment, but more selective institutions may have lower acceptance rates.

About the author

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer who covers topics such as credit cards, loans, investing, and budgeting. She has worked for major brands such as Mastercard and Visa, and her work has been featured by MoneyGeek, Slickdeals, TaxAct, and LegalZoom. Read full bio.

SOISL-Q325-039

Student loans — federal or private — begin accruing interest when they’re disbursed, with the exception of Federal Direct Subsidized Loans.

Understanding when student loans start accruing interest is essential for managing college costs and planning your financial future. Interest can begin accumulating at different times depending on the type of loan — federal or private, subsidized or unsubsidized — which can significantly impact the total amount you repay over time.

Knowing the rules around interest accrual can help you make smart decisions about borrowing, repayment, and even early payments while still in school. Keep reading when and how student loan interest starts to add up so you can stay informed and avoid unwanted surprises.

Interest Accrual Basics and Exceptions

As a general rule, interest begins accruing on a student loan as soon as it’s disbursed. While the repayment of the loan is usually subject to a grace period (detailed later in this article), the interest continues to accrue even while the payments are paused.

The one exception is when certain loans are in deferment. Interest usually does not accrue on the following types of loans while they are in deferment:

•   Direct Subsidized Loans

•   Perkins Loans

•   The subsidized portion of Direct Consolidation Loans

•   The subsidized portion of Federal Family Education Loan Consolidation Loans

What Triggers Interest Accrual on Federal Loans?

Student loan interest on most federal student loans begins to accrue as soon as the loan is disbursed, which is typically when the funds are sent to your school. This means that even while you are still in school, interest is accumulating on your loans, though you may not have to make payments until after you graduate or drop below half-time enrollment.

For federal subsidized loans, interest is triggered when a borrower enters repayment, typically after the end of the grace period following graduation, leaving school, or dropping below half-time enrollment.

Interest-Free Periods and Deferments

Certain federal student loans, such as Direct Subsidized Loans mentioned above, offer interest-free periods during specific times in a borrower’s academic and post-academic journey. While enrolled in school at least half-time, during the six-month grace period after leaving school, and during qualifying deferments, the federal government pays the interest on subsidized loans.

Student loan deferment allows borrowers to temporarily postpone loan payments due to qualifying circumstances such as returning to school, unemployment, economic hardship, or active military duty. For subsidized federal loans, deferment can also pause interest accrual, which provides financial relief without increasing the loan balance.

The Basics of Student Loan Interest

A student who takes out a student loan (or a parent who takes out a parent-student loan in their own name) signs a promissory note outlining all the terms of the loan, including the loan amount, interest rate, disbursement date, and payment schedule.

Federal student loans issued after July 1, 2006, have a fixed rate. The repayment default is the standard 10-year plan, but there are options, such as income-based repayment or a Direct Consolidation Loan, that can draw out repayment to double that or more.

Private student loans are not eligible for federal income-driven repayment plans. Interest rates on private student loans may be fixed or variable, and are based on your — or your cosigner’s — financial history. The repayment term can be anywhere from five to 20 years.

Recommended: How Do Student Loans Work?

Interest and Grace Periods by Loan

Capitalized interest on student loans can significantly increase how much a borrower owes. This is when a lender adds unpaid interest to your principal loan balance and then charges interest on your larger balance.

The Department of Education implemented new regulations in July 2023 eliminating all instances of interest capitalization that are not specified in the Higher Education Act of 1965 (HEA). That means federal student loan interest capitalization on subsidized loans no longer occurs when a borrower first enters repayment status following the grace period.

A federal student loan borrower who exits a period of deferment on an unsubsidized loan or who overcomes a partial financial hardship on an income-based repayment plan may face capitalized interest charges. Federal student loan interest capitalization can also occur upon loan consolidation. These are the few instances where federal law requires interest capitalization.

Fixed interest rates on newly disbursed federal student loans are determined by formulas specified in the HEA. These are the rates and loan fees (deducted from each disbursement) for the 2025–26 school year:

•   6.39% for Direct Subsidized or Unsubsidized Loans for undergraduates

•   7.94% for Direct Unsubsidized Loans for graduate and professional students

•  8.94% for Direct PLUS Loans for graduate students, professional students, and parents

Recommended: Types of Federal Student Loans

Unsubsidized Student Loans

Federal Direct Unsubsidized Loans are available to undergraduate and graduate students with no regard to financial need.

Loan fee: 1.057%

Grace period: While you’re in school at least half-time and for six months after graduation.

Subsidized Student Loans

Federal Direct Subsidized Loans
are available to undergraduates who demonstrate financial need.

Loan fee: 1.057%

Grace period: While you’re in school at least half-time and for six months after you leave school. The government pays the interest during those grace periods and during any deferment.

Direct PLUS Loans

Taken Out by a Parent

A Parent PLUS Loan acquired to help a dependent undergraduate is unsubsidized.

Loan fee: 4.228%

Some private lenders refinance Parent PLUS loans at what could be a lower rate.

Grace period: First payment is due within 60 days of final disbursement, but a parent can apply to defer payments while their child is in school at least half-time and for six months after.

Taken Out by a Graduate Student or Professional Student

Grad PLUS Loans are available to students through schools participating in the Direct Loan Program.

Loan fee: 4.228%

Grace period: Automatic deferment while in school and for six months after graduating or dropping below half-time enrollment.

Private Student Loans

Some banks, credit unions, state agencies, and online lenders offer private student loans.

Rate and fee: Rates can be fixed or variable, and rates and fees vary by lender

Grace period: Student loan interest accrual begins when a private student loan is disbursed, but payments may be deferred while a borrower is in school.

Recommended: Private Graduate Student Loans

How Is Interest on Student Loans Calculated?

Student loans typically generate interest every day. Your annual percentage rate (APR) is divided by 365 days to determine a daily interest rate, and you are then charged interest each day on the total amount you owe.

That interest is added to your total balance, and you’re then charged interest on the new balance — paying interest on interest until the loans are paid off.

If you don’t know what your monthly payments will be, a student loan payment calculator can help. This one estimates how much you’ll be paying each month so you can better prepare for your upcoming bills.

The amount you pay each month will be the same, but the money first goes toward paying off interest and any fees you’ve been charged (like late fees); the remainder goes to pay down the principal of the loan.

As you pay down your loan, because the principal is decreasing, the amount of interest you’re accruing decreases. And so, over the life of your loan, less of your monthly payment will go toward interest and more will go toward the principal. This is known as student loan amortization.

Fixed vs. Variable Interest Rates

Federal student loans have fixed interest rates, but private student loans can have fixed or variable rates. A fixed interest rate remains the same throughout the life of the loan, providing predictability and stability in your monthly payments. This can be advantageous if you prefer a consistent budget and want to avoid the risk of interest rate fluctuations.

On the other hand, a variable interest rate can change over time, typically in response to market conditions. While this can result in lower payments if rates decrease, it also carries the risk of higher payments if rates rise. Understanding the pros and cons of each can help you make an informed decision that aligns with your financial goals and risk tolerance.

Capitalization of Interest

Capitalization of interest on private student loans occurs when unpaid interest is added to the loan’s principal balance, typically after periods of deferment, forbearance, or when a borrower begins repayment. This means future interest is calculated on a higher principal amount, which can significantly increase the total cost of the loan over time.

Unlike federal loans, where capitalization rules are clearly defined and sometimes limited, private lenders set their own policies — often capitalizing interest more frequently or under broader circumstances.

How You Could Save on Interest

Because interest can add up so quickly, it’s important to pay attention to the interest rates you’re paying on your student loans.

Student loan refinancing — taking out a brand-new loan that pays off your current loans — can lower the amount of interest your loans accrue if you qualify for a lower interest rate or a shorter term.

Even a small difference in interest rates could help you save a substantial amount of money paid in total interest over the life of the loan, depending on the term you select. To see how refinancing might save you money, take a look at this student loan refinance calculator.

It’s important to know, though, that refinancing federal student loans will make them ineligible for federal benefits like income-driven repayment plans and Public Service Loan Forgiveness.

Making Payments During School or Grace Period

Making student loan payments while still in school or during the grace period can significantly reduce the total cost of borrowing. Even small payments toward the interest on unsubsidized or undergraduate private loans can prevent that interest from capitalizing when repayment begins.

This helps keep the loan amount from growing and reduces the interest you’ll pay over the life of the loan. Starting payments early also builds good financial habits, minimizes future debt stress, and may shorten the overall repayment timeline.

The Takeaway

When does student loan interest start accruing? The minute the loan is disbursed, except on Federal Direct Subsidized Loans. It’s important for borrowers to understand and pay attention to when the interest starts accruing, as that interest can be capitalized and increase the total cost of the loan.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

When do unsubsidized student loans start accruing interest?

Unsubsidized student loans start accruing interest as soon as the loan is disbursed. This means interest begins to accumulate from the moment the funds are sent to your school, even while you are still in college. You can choose to pay the interest while in school or defer it.

Do subsidized loans ever accrue interest?

Subsidized loans do not accrue interest while you are in school at least half-time, during the grace period after graduation, or during deferment periods. However, interest begins to accrue once you enter repayment, typically six months after graduation.

How does interest capitalization affect loan balance?

Interest capitalization adds unpaid interest to the principal balance of your loan, increasing the total amount you owe. This can lead to higher monthly payments and more interest accruing over time, making the loan more expensive in the long run.

Can you avoid student loan interest completely?

Avoiding student loan interest completely is challenging but possible. Opt for grants, scholarships, or work-study programs. If you take out loans, pay the interest while in school or during grace periods to prevent capitalization. Choose loans with lower interest rates and pay them off quickly.

Does refinancing stop interest accrual?

Refinancing doesn’t stop interest accrual; it replaces your existing loans with a new one, often with a different interest rate. The new loan will continue to accrue interest, but the rate and terms may be more favorable, potentially reducing the overall interest paid.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOISL-Q325-021

Layaway may sound like an old-fashioned concept, but it’s still offered by some retailers and can help people afford an item without running up credit card debt.

Layaway allows you to buy an item over time via installment payments. When you’ve paid the full price, you get to take your purchase home. This can be a helpful financing tool in some situations, but also comes with some potential downsides. For example, there may be fees involved, as well as the possibility of forfeiting your payments if you can’t keep up with them. Here are important things to know about layaway.

What Is Layaway?

Layaway means you make a deposit and a retailer holds your item (or lays it away) and collects the rest of the money over time. When paid in full, you collect your purchase.

Here’s a bit more detail on how layaway works.

•   The customer chooses an item that’s eligible for layaway and makes whatever down payment the store requires to implement a layaway plan. (This amount varies based on the retailer, and may or may not include a service fee.)

•   The customer then makes regular payments over time based on the retailer’s schedule. These payments may be made weekly, biweekly, or monthly. Online layaway plans often let customers buy items according to scheduled deductions from their checking account.

•   At the end of the layaway plan period, when the item has been paid for in full, the customer takes their purchase home or receives it in the mail.

One additional point about how layaway works: If the customer makes late payments or cancels the layaway plan entirely, they may be charged a restocking or cancellation fee. They may also forfeit some or all of the money they’ve put toward the purchase already.

Why Use a Layaway Plan?

From the store’s perspective, layaway offers a low-risk way to make sales to those who might not otherwise be able to afford the purchase all at once.

Although the retailer might choose to charge a small fee to cover the item’s being tied up for the length of the layaway, if worse comes to worse and the buyer defaults, they can simply put the item back up on the shelf for sale.

From a buyer’s perspective, the attractiveness of layaway is even more obvious: It allows those who might not otherwise have the financial leverage to make large purchases affordably, over time.

Layaway is unique among financing options in that it often doesn’t involve interest, which means it can often be a more affordable choice than other types of credit or loans.

Recommended: How to Make Money Fast

Pros and Cons of Layaway

Like any financial approach or product, there are both benefits and drawbacks to layaway plans.

Pros of Layaway

•   You don’t have to go into debt to make a purchase you would otherwise not be able to afford. Using layaway can help you avoid charging an item on your credit card, which typically incurs high interest rates.

•   Layaway plans don’t require a credit check — which also means that your credit won’t be affected if you can’t pay the plan on time or in full.

•   Fees associated with layaway plans are generally low and often don’t include interest.

Cons of Layaway

•   Although they’re generally low, layaway plans often do come with associated fees, such as service, restocking, and cancellation fees. These are typically flat fees, however, which could make them proportionately high if you’re purchasing a relatively inexpensive item.

•   If you make late payments or fail to pay in full, you might forfeit some or all of the money you’ve already put toward the purchase (though this varies by vendor, so check with the individual retailer you’re considering for full details).

•   Repayment terms can be inflexible and it’s up to the vendor to set the repayment schedule.

•   Layaway takes time and patience; it’s an example of delayed gratification. It may be less attractive to those who want or need to take home the purchase immediately rather than waiting until it’s been paid in full.

Stores That Offer Layaway Plans

Layaway was originally offered back in the 1930s as a result of the Great Depression, then began fading away when using credit cards became more common later in the 20th century. However, the popularity of layaway surged again during the Great Recession of 2007-2009.

The history of recessions tells us they do happen over the years, and the popularity of layaway surged again during the Great Recession of 2007-2009.

These days, many retailers still offer both in-store and online layaway, either for the holidays or year-round.

In some cases, you may only be able to implement layaway on certain products — generally more expensive ones, like appliances and jewelry.

Layaway programs come and go, but retailers that currently offer layaway include the following:

•   Amazon

•   Burlington Coat Factory

•   Army & Air Force Exchange Service

•   Buckle

•   Gabe’s

•   Hallmark Gold Crown

If you’re unsure whether or not a retailer offers layaway, you can always ask!

4 Alternatives to Layaway

Here are some other ways customers can get their hands on items they might not be able to buy in a single purchase.

1. Similar Pay-Over-Time Plans

Some retailers, especially for online purchases, offer buy-now-pay-later or pay-over-time programs that are similar to layaway — rather than paying the full price today, you pay small installments over time.

On the plus side, customers can often receive their purchases before the payment plan has been completed.

However, some of these programs, like Affirm (a payment option available at checkout at many online retailers), can involve interest charges, particularly if borrowers are late on their payments or don’t complete the repayment plan in full.

2. Credit Cards

Credit cards are an obvious alternative to layaway plans — and using them, of course, means that the purchase can be taken home right away.

In fact, credit cards are sort of like the opposite of layaway: With layaway, you pay for an item and then receive it; with credit cards, you receive it now and pay for it later.

Of course, using credit cards almost always involves compounding interest charges, often close to 20%, which is nothing to sneeze at.

Since it’s easy to carry a revolving balance while making minimum monthly payments, credit cards can quickly lead to a credit card debt spiral that can be difficult to climb out of.

3. Reconfiguring Your Budget

If being unable to make large purchases is more of a systemic problem than a one-time issue, some budget management may be in order.

You might start by looking at how much money is coming in versus going out, then try to find places where you can cut back on spending. This can help free up funds that you can use to pay for purchases you really need or want in full without requiring layaway.

Recommended: How to Make a Budget in 5 Steps

4. Saving Up for a Purchase

Another option to layaway is to save up in advance until you have enough cash to go ahead and buy the item outright. Let’s say you want to buy a new laptop. You might automate your savings and have $25 transferred from checking on payday to a savings account (ideally, a high-yield savings account). Over time, the savings will build up and interest will accrue.

When you reach the amount needed, ta-da! You can go purchase your new laptop, without paying any interest or other fees related to buying it over time.

The Takeaway

Layaway is a purchasing method where you reserve an item by making a deposit and then pay the remaining balance over time before taking the item home. While this approach can cost less than putting the purchase on your credit card, it’s not necessarily cost-free. Layaway plans often involve various fees, such as service fees, restocking fees, or cancellation fees.

If you’d like to start saving for a purchase, it can be wise to find a bank account that offers low or no fees and a solid interest rate to help your money grow faster.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How does a layaway plan work?

A layaway plan lets you reserve an item by making a small down payment and then paying the remaining balance over time. The store holds the items until it’s fully paid off, at which point you can take it home. Layaway is often interest-free, but some retailers may charge service or cancellation fees. It can be a helpful option for budgeting larger purchases without using credit or paying all at once.

Is it a good idea to buy things on layaway?

Buying on layaway can be a smart choice if you want to avoid credit card interest or don’t qualify for financing. It can help with budgeting by breaking up large purchases into management payments. However, layaway may not be ideal if the store charges high service or cancellation fees. Also, you don’t receive the item until it’s fully paid off, which could be a downside for urgent needs.

What is the difference between an installment plan and a layaway plan?

The key difference lies in ownership. With an installment plan, you typically take the item home immediately and make payments over time, often with interest. With a layaway plan, the store holds the item until you finish paying, and you usually don’t pay interest. Installment plans often involve credit checks, while layaway does not. Each suits different needs: Installment plans provide quicker access, while layaway allow for more controlled, no-credit spending.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBNK-Q325-056