Student Loan Interest: When It Starts and How to Tackle It

#1 Student loan lawyer

Updated on April 10, 2023

Embarking on life after college is exhilarating, but managing student loan debt can be intimidating for many. A crucial concern is understanding when interest begins to accrue on student loans and how it influences your overall debt.

Too often, borrowers are surprised by the mounting interest, leading to a seemingly unending cycle of debt. Without a clear grasp of the types of loans you have, when the interest starts, and its calculation, making informed decisions about repayment and budgeting becomes difficult.

Ahead we’ll unravel the complexities of student loan interest, explore when interest begins for various loan types, explain its calculation, discuss capitalization, and provide tips for effectively managing and reducing your student loan interest.

Federal student loan interest pause

Thanks to President Joe Biden’s pandemic forbearance measures, federal student loan payments and interest are currently on hold.

The pause lasts until 60 days after the Education Department can start the one-time debt cancellation, litigation is resolved, or 60 days after June 30, 2023 – whichever comes first. Once the pause ends, regular loan interest rates will apply.

Related: When Do Student Loan Payments Resume?

On Feb. 28, the Supreme Court heard arguments challenging President Biden’s plan to cancel up to $20,000 in student debt per borrower. Though the court aims for an expedited decision, a resolution could take months.

Barring further forbearance extensions by the president, the repayment clock resumes based on the mentioned conditions.

To stay informed, update your contact information on and with your loan servicer. This ensures you receive timely notifications about payments and interest resuming.

Student loan types and interest rates

Before diving into interest details, let’s quickly review the student loan types you might have. Understanding these loans helps you grasp how interest rates work and their implications on your specific loan.

From federal loans like Direct Subsidized, Direct Unsubsidized, and Direct PLUS Loans to private student loans from various financial institutions, each loan type carries unique interest rates and terms. Federal loans have fixed interest rates set yearly by Congress, ensuring your rate remains unchanged throughout the loan.

Let’s explore the different loans and their interest rates.

Federal student loans

  • Direct Subsidized Loans – These loans offer lower interest rates for undergraduate students with demonstrated financial need, and the federal government covers interest during school, grace periods, and deferment.

  • Direct Unsubsidized Loans – Open to undergraduate, graduate, and professional students without financial need requirements, these loans have relatively low-interest rates but accrue interest from disbursement.

  • Direct PLUS Loans – Catering to graduate or professional students and parents of dependent undergraduates, Grad PLUS and Parent PLUS Loans have higher interest rates and accrue interest right after disbursement.

Private student loans

Banks, credit unions, and other financial institutions offer private student loans with varying interest rates and terms. You can have fixed or variable interest rates that depend on factors like your credit score.

Interest typically accrues from disbursement, but verify specific terms with your lender. Private loans usually offer three repayment options:

  1. Make full principal and interest payments immediately.

  2. Make interest-only payments during school to prevent interest buildup.

  3. Defer all payments until after school, which can be the most expensive option in the long run, but requires no payments during classes.

When student loans start accruing interest

Interest accrues on federal student loans as soon as they’re disbursed. For Direct Subsidized Loans, interest doesn’t accrue during school, grace periods, or deferment. For Direct Unsubsidized Loans, interest accrues from disbursement, including while in school and during grace periods or deferment.

Understanding this helps you manage your loans and prevent interest from spiraling out of control.

Here’s the interest accrual timeline for different student loans:

Federal student loans

  • Direct Subsidized Loans – The U.S. Department of Education covers the interest for subsidized loan borrowers while in school at least half-time, during the grace period (usually 6 months after leaving school), and during deferment periods. Interest starts accruing after the grace period ends.

  • Direct Unsubsidized Loans – Interest on unsubsidized loans starts accruing from the moment they’re disbursed, including while in school, during grace periods, and during deferment or forbearance.

  • Direct PLUS Loans For PLUS loans (for graduate students or parents) – Interest begins accruing as soon as the loan is disbursed, without grace periods. Keep this in mind when planning your repayment strategy.

Private student loans

Private student loans vary by lender. Generally, interest accrues upon disbursement. Some lenders may offer a grace period, while others don’t.

Check your loan agreement or contact your lender to discover when the interest starts for your private loan. Don’t hesitate to ask questions and clarify your terms!

Capitalized interest on student loans

Understanding interest accrual on student loans is crucial, as is learning about capitalization. This concept impacts your overall loan balance and significantly affects the total amount you’ll repay.

We’ll briefly cover capitalization here, but for more details, read our dedicated article on student loan interest capitalization.

What is capitalization?

Capitalization occurs when unpaid interest on your student loan is added to the principal balance, causing you to pay interest on interest and increasing your overall loan balance.

When capitalization happens

Capitalization typically occurs after grace periods, deferment, or forbearance ends or when you switch repayment plans or miss a payment deadline.

Impact on loan balance

Capitalization increases your loan balance, resulting in more interest paid over the loan’s life. The more frequent capitalization events, the greater the effect on your total repayment amount.

That’s why understanding capitalization and managing student loan interest is essential for controlling your debt.

Calculating interest on student loans

Student loan interest is typically calculated using a simple daily interest formula. This formula multiplies your loan balance by your interest rate and divides the result by the number of days in a year, giving you the daily interest amount that builds up until paid off or capitalized.

For more in-depth information, explore our articles on compound student loan interest.

Simple daily interest

Formula Interest is calculated by multiplying your loan balance by your interest rate and dividing the result by the number of days in a year. The daily interest amount accumulates until paid off or capitalized.

Example calculation

  • Timmy, a recent graduate, owes $23,000 in Direct Subsidized Loans and $34,500 in Direct Unsubsidized Loans, totaling $57,500.

  • Timmy’s Direct Subsidized Loans have a 4% interest rate, and his Direct Unsubsidized Loans have a 5% interest rate.

  • Since interest doesn’t accrue on subsidized loans during the grace period, we’ll only calculate interest for unsubsidized loans.

  • Using the simple daily interest formula: ($34,500 x 0.05) / 365 = $4.73 daily interest

  • Over the six-month grace period (about 180 days), the total interest accrued is $4.73 x 180 = $851.

  • If Timmy doesn’t pay that interest before the grace period ends, the interest will be added to his principal balance. From that point forward, he’ll be paying interest on interest.

This example shows how interest can accumulate quickly, even during the grace period, especially on Direct Unsubsidized Loans.

Try our student loan interest calculator to see how various scenarios impact your interest costs.

Strategies for managing and reducing student loan interest

To reduce student loan interest, consider making payments during the grace period, paying more than the minimum amount, applying for income-driven repayment plans, refinancing your loans, using loan forgiveness programs, and creating a budget and repayment plan that works for you.

  1. Make payments during the grace period – If possible, make payments on your student loans during the grace period, particularly for unsubsidized loans that accrue interest during this time. This helps prevent interest from capitalizing and reduces the overall loan cost.

  2. Pay more than the minimum amount – Pay more than the minimum required payment on your loans when you can. Extra payments reduce your principal balance, decreasing the interest that accrues over the life of the loan and helping you pay off loans faster. Note: Inform your loan servicer that overpayments should be applied to the current month’s payment to lower the principal.

  3. Apply for income-driven repayment plans – Consider an income-driven repayment plan for federal loans. These plans cap monthly payments based on your income and family size, potentially reducing interest accrual over time.

  4. Refinance your loans – With a strong credit score and stable income, or a cosigner with both, refinancing student loans can secure a lower interest rate and save money in interest. Keep in mind that refinancing federal loans with a private lender gives up access to federal benefits and protections like IDR plans and student loan forgiveness programs.

  5. Use loan forgiveness programs – Explore loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness, if you work in qualifying public service or teaching positions. These programs can forgive your entire loan amount remaining on your loans after meeting specific requirements, potentially saving a large amount in interest.

  6. Create and adhere to a plan – Establish a realistic budget and repayment plan that works for you. By being disciplined in making payments and managing your finances, you’ll be better equipped to tackle student loan interest and overall debt.

Bottom Line

Understanding the intricacies of student loans can be challenging, but knowing when the interest starts accruing, how it’s calculated, and strategies for managing it is crucial.

By learning about student loan interest, you’ll be better prepared to make informed decisions and potentially save money over the life of your loans.

Be proactive, take control of your student loan debt, and pave the way toward a brighter financial future!

UP NEXT: What Increases Your Total Student Loan Balance?

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