Do Student Loans Accrue Interest While in Graduate School?

For individuals pursuing advanced degrees, understanding how student loans accrue interest during graduate studies is crucial. The answer depends significantly on the type of student loan, with distinct rules for federal and private programs. Understanding these differences is important for managing educational debt effectively.

How Interest Accrues on Student Loans

Student loan interest is the cost of borrowing money, calculated as a percentage of the outstanding principal balance. Interest typically accrues daily, meaning a small amount is added to the loan balance each day. The daily interest amount is determined by multiplying the principal balance by the annual interest rate, then dividing by 365 days.

Most student loans use simple interest for daily accrual, calculated only on the original principal or current balance. However, compound interest becomes relevant through interest capitalization. Capitalization occurs when accrued, unpaid interest is added to the loan’s principal balance.

Once interest capitalizes, future interest calculations are based on this new, higher principal amount. This means the borrower pays interest on interest already accrued, increasing the total loan cost. Capitalization events often occur at the end of a grace period, deferment, or forbearance, or if income-driven repayment plan payments do not cover accruing interest.

Federal Student Loans and Graduate School

Federal student loans offer specific benefits regarding interest accrual during graduate school, which vary by loan type. Direct Subsidized Loans are not available to graduate students; they are reserved for undergraduates who demonstrate financial need.

Direct Unsubsidized Loans are available to graduate students, and interest begins to accrue immediately upon disbursement. While enrolled at least half-time, interest continuously accumulates on these loans. Although payments are not required while enrolled, the accruing interest will eventually be added to the principal balance through capitalization.

Federal student loans include an “in-school deferment” period, which automatically pauses payments while a borrower is enrolled at least half-time. For Direct Unsubsidized Loans, interest accrues during this deferment period. After graduation, or if enrollment drops below half-time, federal student loans typically enter a six-month grace period before repayment begins. Interest continues to accrue on Direct Unsubsidized Loans throughout this grace period and will capitalize at its end if unpaid.

Private Student Loans and Graduate School

Private student loans, offered by banks, credit unions, and other financial institutions, operate differently from federal loans regarding interest accrual during graduate school. Private loans almost always accrue interest from the moment they are disbursed. Interest accumulates on the loan balance throughout enrollment, regardless of student status.

Private lenders do not offer the same in-school deferment benefits as federal loans. While some private lenders may allow for deferred payments during enrollment, interest will still accrue. Lenders may offer various payment options during graduate school, such as immediate full principal and interest payments, interest-only payments, or fully deferred payments.

Even if a private loan allows for deferred payments, the accrued interest will likely capitalize at a predetermined point, such as upon entering repayment. This capitalization increases the loan’s principal balance. Borrowers should carefully review their private loan agreements to understand the specific terms related to interest accrual and payment obligations while in graduate school.

Strategies for Managing Interest

Proactively managing interest accrual can significantly reduce the total cost of student loans during graduate school. One effective strategy for borrowers with unsubsidized federal loans or any private loans is to make interest-only payments while enrolled. Paying down the accruing interest prevents it from capitalizing onto the principal balance, which would otherwise increase the total amount subject to future interest calculations.

Even small, consistent payments toward accruing interest can yield substantial savings over the life of the loan. This approach helps to keep the principal balance from growing larger than the original amount borrowed. Avoiding interest capitalization means that when repayment eventually begins, the borrower is paying interest on the original amount, rather than on a larger, inflated balance.

Borrowers should also understand the terms of any deferment or forbearance options available through their lenders. While these options can provide temporary relief from making payments, interest often continues to accrue during these periods. If that accrued interest is not paid, it will typically capitalize at the end of the deferment or forbearance, adding to the principal and increasing the overall debt.