Interest Accrual on Student Loans: When It Starts and How To Manage It

Most federal and private student loans start accruing interest as soon as the money is disbursed. Accrued interest can add substantial costs to each loan, especially when rates are high.

The Consumer Financial Protection Bureau reports that borrowers could collectively pay more than $3 billion in additional interest for loans taken out during the 2024-25 school year.

Understanding when and how interest accrues can help you make the best decisions about repaying your student loans. Here's what you need to know.

What is accrued interest?

Accrued interest is interest that builds up on your loan between payments. Interest can accrue before you start making payments, and will continue to accrue while you're in repayment.

Interest that accrues before you start making payments may capitalize. That means it's added to your unpaid loan balance. Your interest is then recalculated based on the new, higher loan balance, meaning you pay interest on the interest that was added.

Not all student loans accrue interest while you're in school, although many do.

Current private student loan rates

When does interest start accruing on federal student loans?

There are two types of federal student loans: unsubsidized and subsidized. While both allow a six-month grace period after graduation before repayment begins, interest accrual works differently for each type.

Unsubsidized federal student loans

Two types of federal student loans are unsubsidized: Direct Unsubsidized Loans and Direct PLUS Loans.

Unsubsidized loans begin accruing daily interest as soon as the loan money is sent to your school. If you have an unsubsidized federal student loan, the interest will builds up until you enter repayment, at which point it will be added to your unpaid principal balance (this is known as capitalization).

Unsubsidized loans continue to accrue interest while you're in school and during your six-month grace period, but you don't have to make any payments on these loans until your grace period ends.

Interest also accrues on these loans during periods of deferment and forbearance. If you need to put your unsubsidized loan in deferment or forbearance to pause payments, you're not required to make payments during that period, but interest will continue to accrue. If you don't pay the interest as it accrues, the interest will capitalize at the end of the deferment. But capitalization doesn't occur after a forbearance.

Subsidized federal student loans

Federal Direct Subsidized Loans are available to students who demonstrate financial need. The government pays the interest for subsidized loan borrowers while they're in school and during other eligible periods of nonpayment. For subsidized loans, interest doesn't accrue until one of the following occurs:

• The borrower leaves school.
• The borrower drops below half-time enrollment.
• The borrower reaches the end of the 6-month grace period.

In addition, subsidized loans don't accrue interest during a periods of deferment — the government pays the interest. Note that interest does accrue during periods of forbearance.

Read More: Subsidized vs. Unsubsidized Student Loans

Interest accrual on private student loans

Private student loans typically work like unsubsidized federal loans, with interest accruing when the loan is paid out to your school. Depending on your private lender's policy, you may not have to make payments while you're in school. Many private lenders offer students a payment deferment during school.

Since repayment rules vary among lenders, make sure you understand exactly what your private student loan requirements are before signing the loan agreement.

You'll typically get to choose between three repayment options for your private student loan:

• Make full principal and interest payments right away: This will reduce the cost and time spent repaying your student loan, but earning enough money to make these payments during school may be tough for full-time students.
• Make interest-only payments in school: This keeps your loan balance from growing while you're in school, and may be easier to afford than trying to make full principal and interest payments during school.
• Defer payments until after leaving school: You may be able to defer payments until after completing your education, but this plan will typically be the most expensive overall. Interest will continue to accrue and the loan balance will continue to grow.

How student loan interest is calculated

All federal student loans and most private student loans use a simple interest calculation for interest accrual. This means your interest is calculated based only on the principal balance.

Interest accrues daily on student loans. To calculate your daily interest accrual, you would use the following formula, where 365.25 represents the number of days in a year:

(Current Principal Balance x Interest Rate) ÷ 365.25 = Daily Interest Accrual

For example, let's say you have a federal Direct Unsubsidized Loan with a balance of $8,000 and an interest rate of 6.53%. Here's how you would calculate your daily interest accrual:

($8,000 x 0.0653) ÷ 365.25 = $1.43

This means your loan accrues $1.43 in interest each day. To see how that would accumulate over time, you would multiply the daily interest accrual by the number of days until the next payment.

Let's say you want to determine how much interest will accrue during your six-month grace period. You would multiply $1.43 by 180 (the number of days in a six-month period):

$1.43 x 180 = $257.40

Even though the daily interest accrual may be relatively small, it will add up over time.

Strategies to manage student loan interest

Jen Smith, a personal finance expert and co-author of “Buy What You Love Without Going Broke,” warns borrowers that student loan interest can really increase the cost of your loan.

“It may be a lower interest rate than your credit card,” Smith says. “But it's a large loan right off the bat, and people don't realize how quickly it grows. You might have a $30,000 undergraduate student loan, and you could pay a third of that in interest over the life of the loan.”

Smith wanted to avoid paying so much interest, so she and her husband worked to pay off $74,000 in federal student loan debt in their first two years of marriage.

 “We thought it would take us five years and expected to pay a lot more in interest,” she says. But the speed of their payoff worked in their favor. “Because we paid it off so fast, we paid much less in interest.”

While Smith describes her fast-paced payoff plan as a little extreme (and she does not necessarily recommend everyone do the same), there are some gentler methods you can use to manage your student loan interest:

1. Make interest-only payments in school: To help keep costs down, consider making interest-only payments while you're in school if you can afford it. By paying off the interest as it accrues, your loan balance won't grow while you're enrolled in school.
2. Set up automatic payments: Most student loan servicers offer a discount on your interest rate if you use an “autopay” feature, which automatically deducts money from your bank account for your student loan payment when it's due.
3. Make extra payments: Paying more than your monthly minimum payment can reduce your loan balance faster and save you money on interest. This was the strategy Smith and her husband used to pay off their student loans in 2 years. If you decide to make extra payments, ask your loan servicer to apply the extra payment to your balance.
4. Consider refinancing your loans to lower your interest rate: Depending on your financial situation, you may be able to refinance your private student loans into a new loan with a lower interest rate. This could reduce your monthly payment and lower the amount you pay in interest before your loan is paid off.

Keep in mind, if you refinance federal student loans, you'll lose access to federal benefits, such as flexible repayment plans and student loan forgiveness programs.

How interest affects the total cost of student loans

When you take out a student loan, you can expect to repay the lender more than you borrowed. That's because interest accrues on the loan daily, and student loan balances tend to be relatively large.

Most student loans use simple interest to calculate interest accrual. That means the borrower only pays interest on the outstanding balance, not on any interest that has accrued. One exception is for borrowers on an income-driven repayment plan — your monthly payment may be too low to cover all of the interest for the month, so you'll be responsible for this interest as it grows.

When unpaid interest is capitalized (added to the principal), the interest compounds. That means the interest is now calculated based on the new, higher balance, which includes the unpaid accrued interest.

Interest accrues during school, the grace period, deferment, forbearance, and other nonpayment periods for nearly all student loans. That accrued interest capitalizes when repayment begins after these periods have come to an end (except forbearance). This means a borrower who has several periods of nonpayment could see interest accrue and capitalize multiple times, increasing the total cost of the loan over its lifetime.

If you're able to make interest-only payments during school or other nonpayment periods, you can save a great deal of money over the life of the loan. Making payments on that interest before it has a chance to capitalize will reduce the balance when repayment begins, lowering the daily interest accrual and the monthly minimum payment amount.

Check Out: 3 Ways To Decide Which Student Loan To Pay Off First