When Do Student Loans Start Accruing Interest?

College is an investment in your future, and if you use loans to pay for the cost, it’s important to understand how the interest works. Like other types of loans, student loans have an interest rate, which is the cost of borrowing the money. The lender charges interest throughout the repayment term, and charges often begin immediately. 

Most student loans accrue interest when the lender disburses the funds. But one type of federal loan—Direct Subsidized Loans—does not accrue interest immediately. Here’s everything you need to know about student loan interest, including how to minimize the costs.

When do federal student loans start accruing interest? 

Most federal loans start accruing interest as soon as the lender disburses the funds, but that’s not always the case. Here’s how interest accrues for each type of federal loan. 

Loan type	Interest rate	When interest accrues & how often
Subsidized Loans	5.50%	Once you leave school or drop below half-time & after 6-month grace period ends; Daily
Unsubsidized Loans	5.50%* or 7.05%**	As soon as loan is disbursed; Daily
Direct PLUS Loans	8.05%	As soon as the loan is disbursed; Daily

Direct Subsidized Loans are the only student loans that don’t immediately accrue interest. This can save you thousands of dollars throughout your repayment term. If you need student loans, use Subsidized Loans first, and consider other options if you need more funds. 

Federal student loans accrue interest daily, which means your balance will always grow, especially due to capitalized interest. For example, if you have a $4,000 Direct Unsubsidized Loan with a 5.50% interest rate and a standard 10-year repayment plan, you can expect to pay $1,209.26 toward interest. 

When do private student loans start accruing interest?

Private loans start accruing interest as soon as they’re disbursed, and interest typically accrues daily. However, most private lenders allow students to choose from different repayment plans, including interest-only payments while in school.

Private lenders typically offer the following payment plans while you’re in school. Some of the plans can help reduce the overall interest you pay.

• Deferred repayment: Most private lenders allow borrowers to pay nothing toward their student loans while enrolled in school. If you choose this option, you don’t need to begin making payments until after you graduate and complete your grace period, usually six to nine months. 
• Fixed repayment: Borrowers with private student loans can also choose to pay a set amount toward their loans each month while in school. The monthly repayment amount is usually $25, and estimates show that spending a small amount each month can reduce the total loan cost by 6%.
• Interest repayment: Lenders also offer the option to make interest-only payments while in school. Paying interest reduces the total amount you owe because the interest will not capitalize. Estimates show that when borrowers make interest-only payments, they can reduce their total loan amount by 13% compared to borrowers who do not make payments while in school. 

One important difference with private lenders is that you have the option to choose from two types of interest rates: variable or fixed. Variable-rate loans have interest rates that fluctuate with the market, which can affect your monthly payment. Fixed-rate loans have a consistent interest rate throughout the loan term. 

Understanding these differences can help you grasp the long-term financial implications of your choices. The type of interest rate can affect the total cost of the loan and how much you pay each month, but it does not affect when interest starts accruing or how often it compounds. 

How much does accrued interest affect your loan cost?

Accrued interest increases the total cost of your loan. Student loan interest charges are the cost of borrowing money. Every type of student loan comes with interest. But if you can avoid capitalized interest, you can reduce the total cost of the loan. 

The balance grows from the first day if you have a student loan that accrues interest immediately. The unpaid interest begins to capitalize, often after your grace period or deferment ends. 

When interest capitalizes, the lender adds the accrued interest to your total loan amount. As a result, the loan grows, increasing the interest charges. 

Here’s an example of how capitalization affects the total cost of a loan. The following amounts are how much you would owe upon graduation. The calculations don’t account for interest that accrues after graduation. The total interest charges are thousands of dollars higher than the capitalized interest amounts below. 

Loan details	Total loan amount after capitalization	Interest charges
$10,000 at 5.5% interest and  capitalization after 4 years	$12,724.36	$2,724.36
$12,000 at 7% interest and interest-only payments for 4 years	$12,000	$0

Interest capitalization can make the cost of a loan skyrocket. 

Sallie Mae, one of the largest private student loan lenders, estimates that borrowers can reduce their total loan cost by 6% with fixed payments throughout school or 13% with interest-only payments. 

Our expert’s advice

Crystal Rau

CFP®

A student loan is there not to cover the entire cost of your education in most cases, so consider how you can supplement the income you need while going to school or reduce your overall expenses to perhaps not use the entire loan. This can be through the use of work-study programs, applying for scholarships, or even a regular part-time job. This extra income (or reduction of expenses) can go toward your student loan even while you’re in school. It’s your job to be informed and understand how much interest is accruing on your student loan monthly or even daily. Try your best to make a payment on that interest (or more toward the principal), and you won’t have any surprises after your classes end. The same is true when you come across a chunk of money, such as a tax refund or overtime hours earned. Throw those extra funds into your loan. Your future self will thank you.

How can you reduce interest accrued on student loans?

You can take several steps to reduce the interest accrued on your student loans. Here’s how. 

Interest-only payments while in school

Most lenders allow borrowers to make interest-only payments while the loan is in deferment. It might be tempting to make no payments if you don’t need to, but it can help you save thousands of dollars. 

Check out the examples below to see how much making interest-only payments could save.

In-school repayment	Initial loan & interest	Balance at graduation
Interest-only	$15,000 at 7%	$15,000.00
Deferred (none)	$15,000 at 7%	$19,661.94 (+$4,661.94)

Fixed payments while in school

Borrowers can also choose to make fixed payments while in school. With private lenders, the payments are usually about $25 per month. Depending on your total loan amount, that might be more or less than what you accrue in interest each month. Either way, it reduces your total loan amount.

Estimates show that fixed payments while in school can reduce your total loan amount by 6%. For example, if you have a $10,000 loan that would grow to $12,000 by the time you graduate, you could reduce the growth by about $720.

Pick Subsidized Direct loans first

Selecting Subsidized Direct student loans before other loan options is one of the easiest ways to reduce the interest your loan accrues. Subsidized Loans don’t accrue interest while you’re in school. 

Because the lifetime limit for Subsidized Direct loans is $23,000, you might need other loans too. But if you have the option, picking Subsidized Loans first makes sense.

Consider refinancing after graduation

Students also have the option to refinance student loans, which can be useful if they qualify for a lower interest rate after graduation or can’t make payments toward the loan while they’re in school.

Check out the example below to see how much refinancing can save:  

Scenario	Loan & interest rate	Total interest paid
Original loan	$20,000 at 9%	$10,444.70
Refinance	$20,000 at 7%	$7,890.51

As you can see, refinancing can be an effective way to lower the total cost of the loan—but before you refinance federal loans, be sure you’re comfortable giving up federal benefits, such as access to loan forgiveness options and income-driven repayment plans.