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.
Table of Contents
Key Points
• Student loans generally start accruing interest as soon as they are disbursed.
• Subsidized federal loans do not accrue interest while the student is in school or during deferment periods.
• Private student loans may offer deferment with interest accruing, which is added to the principal after the pause.
• Understanding when interest starts and how it is capitalized is crucial for managing repayment effectively.
• Students can save on interest capitalization by making interest-only payments while in school. Students can also consider refinancing to a lower rate.
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.
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