What Type of Student Loan Does Not Accrue Interest?

Student loans are a common means for individuals to finance their education. The accumulation of interest on these loans often adds a significant burden to the overall cost. Understanding how interest accrues is important, as certain student loans are designed to not accrue interest under particular circumstances.

Understanding Student Loan Interest Accrual

Interest accrual refers to the process by which the cost of borrowing money steadily grows over time. Most federal student loans employ simple interest, calculated solely on the original principal amount. This differs from compound interest, which calculates interest on both the initial principal and any accumulated, unpaid interest, potentially leading to a faster increase in the total loan balance. While federal loans generally use simple interest, unpaid interest may be added to the principal, a process known as capitalization, effectively leading to interest being charged on interest.

Federal student loans are distinguished as subsidized or unsubsidized, which dictates when interest begins to accumulate. For unsubsidized loans, interest starts accruing immediately upon loan disbursement, even while the student is still enrolled. Borrowers are responsible for all interest on unsubsidized loans from the outset, including during periods of enrollment, grace periods, or deferment. Subsidized loans offer a different structure regarding interest accrual during specific periods.

Federal Direct Subsidized Loans

Federal Direct Subsidized Loans are a type of federal student aid available to undergraduate students who demonstrate financial need. This financial need is determined by a student’s cost of attendance minus their expected family contribution and any other financial aid received. The federal government pays the interest that accrues on the loan during certain periods, making them a more favorable option compared to unsubsidized loans.

To qualify, students must be enrolled at least half-time in an eligible program and meet general federal student aid eligibility requirements, including U.S. citizenship or eligible non-citizen status, and maintaining satisfactory academic progress. Subsidized loans are targeted to help students with demonstrated financial hardship.

When Interest Does Not Accrue

Interest does not accrue on Federal Direct Subsidized Loans during several specific periods. This applies while the student is enrolled at least half-time. During this in-school period, the loan balance remains free from interest accumulation.

Following a student’s departure from school or if their enrollment drops below half-time, a grace period begins. For Federal Direct Subsidized Loans, this grace period lasts for six months, and the government continues to pay the interest during this time. Interest is also covered by the government during approved periods of deferment, such as unemployment or economic hardship deferment. Not all deferment types qualify for this interest subsidy, and periods of forbearance generally do not prevent interest from accruing, even on subsidized loans.

Applying for Federal Student Aid

Accessing Federal Direct Subsidized Loans begins with completing the Free Application for Federal Student Aid (FAFSA). This application is the gateway to various forms of federal financial assistance, including grants, work-study programs, and federal student loans. Students must complete the FAFSA each academic year to determine their eligibility.

The FAFSA process requires creating a Federal Student Aid (FSA) ID, which serves as a username and password for accessing federal student aid websites and electronically signing the application. For dependent students, a parent must also create an FSA ID to provide their financial information and consent to transfer federal tax data directly from the IRS. After submission, applicants receive a FAFSA Submission Summary, which provides an overview of the information submitted and the Student Aid Index (SAI), a number used by schools to determine financial aid eligibility. Financial aid offices at the colleges listed on the FAFSA then use this information to construct a financial aid offer, outlining the types and amounts of aid a student is eligible to receive.