You’ve graduated and are headed out into the world to start your career. But with all the excitement comes the harsh reality of student loan payments. There is now more than $1.5 trillion in student loan debt in the U.S. and, on average, students graduate with $37,172 in student loans (of those who have student debt). That’s a lot of money to have to pay back—and when you factor in the interest accruing on those student loans, it can all add up quickly.
For federal loans, the fixed student loan interest rate is currently at 5.05% for undergraduate loans taken out for the 2018 to 2019 school year. And for current private student loans, fixed interest rates run from 5% to 14%. The higher the interest rate and the sooner interest starts accruing, the more you’ll likely pay in the long run. Let’s dig into understanding how and when student loans accrue interest.
The Basics of Student Loan Interest
First some basics: When you take out a student loan (or a parent loan), you sign a promissory note outlining all the terms of the loan. That includes, among other things, the loan amount, the interest rate, the disbursement date, the date of the first payment, and a payment schedule.
The default option for federal student loans is the Standard Repayment plan. This is a fixed interest rate 10-year repayment plan with set monthly payments. Of course, this isn’t the only federal student loan repayment option—there are plenty more than may suit your financial situation, such as an income-based repayment plan, where the payment is typically about 10% of your discretionary income, or a Direct Consolidation Loan, which rolls all your federal student loans into one.
For private loans, interest rates can vary, and your repayment term can be anywhere from five to 20 years. The loan terms and rates are determined by your loan servicer.
In repaying your student loans, you’re ultimately paying off the principal and any interest that has accrued on the loan. While borrowers typically make the same set payment each month, the amount that goes toward your principal verses your accrued interest varies throughout your repayment process.
When Do Student Loans Start Accruing Interest?
Your student loan servicer knows you’re a student, first and foremost, while in school. That’s why you’re not expected to pay your student loans back while you’re still actively attending classes at least half-time. But whether or not the loan accrues interest during that time depends on what type of loan you take out.
Unsubsidized student loans, also known as Direct Unsubsidized Loans , charge interest from the moment the loan is disbursed or paid out to you or your school. You aren’t required to make loan payments while you’re enrolled in school at least half-time, but the interest still accrues. That’s why you could owe more when you graduate than when you started.
Federal subsidized student loans , also known as Direct Subsidized Loans offered by the government, accrue interest when you’re a student, during periods of deferment, and during the six-month grace period after graduation, too. The big difference is that you’re not responsible for covering those interest charges—they go on the government’s tab.
Once your grace period is over and you’ve graduated, you’ll be responsible for the interest accruing on your loans. Your loan servicer should contact you regarding the due date of your first payment—if that doesn’t happen, it may be best to contact your loan servicer such that you’re prepared to start making payments when your grace period concludes.
Student loan refinancing could potentially
lower the interest your loans accrue.
Parent loans, also known as Parent PLUS loans, are also unsubsidized and repayment doesn’t necessarily wait until after the student graduates. In fact, repayment on Parent PLUS Loans typically start once the loan is fully disbursed. However, the borrower can choose to defer payment while their student is in school up until six months after graduation—or six months after the student drops below part-time enrollment.
Private student loan terms and interest rates will vary by lender, so check with your servicer to learn how interest accrues on your private loans.
How is Accrued Interest on Student Loans Calculated?
When you signed on the dotted line for your federal student loans, there were most likely terms and details setting out your monthly payment and payment schedule. 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), and then the remainder goes to pay down the principal you owe.
As you pay off your loan, because your 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 also known as amortization.
Part of the reason the interest adds up, or accrues, is because student loan interest typically compounds daily. That means your annual interest rate is divided by 365 days to determine a daily interest rate, and you are then charged interest every single 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 student loan payments will be, you can use SoFi’s student loan calculator to help figure that out. This calculator estimates how much you’ll be paying each month so you can better prepare for your upcoming bills.
How You Could Save Money on Your Student Loan Interest
Because the interest can add up so quickly, it’s important to pay attention to the interest rate you’re paying on your student loans.
If you only make a partial payment or miss a payment, then you could potentially have late fees added to your balance.
Refinancing can lower the amount of interest your loans accrue, because you may be able to qualify for a lower interest rate or term. When you refinance, you’ll take out a brand-new loan with new terms and a new interest rate. To see how refinancing could improve your interest rates, take a look at SoFi’s student loan refinance calculator.
When you refinance your student loans with a private lender, they won’t be subsidized, so interest will begin accruing as soon as the loan is disbursed. Since the interest compounds, even a small difference in interest rates could help save you money on interest payments over the life of the loan (depending on the term you select). And when you refinance your loans with SoFi, there are no origination fees or prepayment penalties.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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