When Do Federal Student Loans Start Accruing Interest?

Federal student loans represent a significant financial commitment for many individuals pursuing higher education. Understanding when interest begins to accumulate on these loans is important for managing overall debt. Interest is essentially the cost of borrowing money, calculated as a percentage of the unpaid principal balance, and it adds to the total amount that must be repaid over time.

Initial Interest Accrual

For most federal student loans, interest generally begins to accrue as soon as the loan funds are disbursed. This immediate accrual applies to a majority of federal loan types, establishing a baseline for understanding how these financial obligations grow. While interest may be building, borrowers are typically not required to make payments until after leaving school or dropping below a certain enrollment status.

Grace Periods and Enrollment Status

Many federal student loans include a grace period, which is a set amount of time after a borrower graduates, leaves school, or drops below half-time enrollment before repayment obligations begin. For Direct Subsidized and Unsubsidized Loans, this grace period is typically six months. During this period, interest continues to accrue on Unsubsidized Loans, meaning the loan balance will increase even without payments. However, Direct PLUS Loans generally do not have a grace period, though graduate or professional students with these loans may receive an automatic six-month deferment.

Current enrollment status also plays a role in interest accrual. If a student is enrolled at least half-time, some federal loans may not accrue interest, or the government may cover it. Maintaining at least half-time enrollment can delay the onset of repayment and, in specific cases, prevent interest from accumulating on certain loan types.

Subsidized Versus Unsubsidized Loans

A fundamental distinction in federal student loans lies in whether they are subsidized or unsubsidized, which significantly impacts when interest accrues. Direct Subsidized Loans are awarded based on financial need, and the U.S. Department of Education pays the interest that accrues during specific periods. This means interest does not accumulate for the borrower while they are in school at least half-time, during the grace period, or during periods of deferment.

In contrast, Direct Unsubsidized Loans are available to both undergraduate and graduate students regardless of financial need. For these loans, interest begins to accrue from the moment the loan is disbursed, and the borrower is responsible for all accumulated interest. If this interest is not paid while it accrues, it can be added to the principal balance through a process called capitalization, increasing the total amount owed.

Deferment and Forbearance

Deferment and forbearance are options that allow borrowers to temporarily pause their federal student loan payments under specific circumstances. During a deferment, interest typically does not accrue on Direct Subsidized Loans or Federal Perkins Loans. This means the loan balance will remain the same as when the deferment began for these specific loan types. Common reasons for deferment include enrollment in school, unemployment, or economic hardship.

However, for Unsubsidized Loans and PLUS Loans, interest continues to accrue during a deferment period, and the borrower remains responsible for this interest. Forbearance, on the other hand, is a temporary postponement of payments where interest generally accrues on all types of federal student loans. This accrued interest will be added to the principal balance if not paid, increasing the total debt. Forbearance is typically granted for financial difficulties, medical expenses, or other acceptable reasons.

Recent Changes and Special Circumstances

Significant events can alter the normal course of federal student loan interest accrual. For instance, the COVID-19 pandemic prompted a temporary pause on payments and set interest rates to 0% for most federal student loans. This measure effectively halted interest accrual for eligible loans. During this period, loan balances did not grow due to interest, providing relief to millions of borrowers.

Interest accrual resumed, and federal student loan payments restarted for most borrowers. While the widespread payment pause ended, some specific programs, like the Saving on a Valuable Education (SAVE) Plan, faced additional court actions that impacted their interest accrual status. Borrowers were advised to prepare for the resumption of interest and payments by updating their contact information and reviewing their repayment options.