When Does Interest Start for Student Loans?

Student loans are a common financial tool for higher education, but they come with a cost beyond the principal: interest. Interest is the charge for borrowing money, calculated as a percentage of the outstanding loan balance. Understanding when interest begins to accrue is important, as it directly impacts the total amount repaid.

Understanding Initial Interest Accrual

Interest accrual on student loans varies by loan type. Federal Direct Subsidized Loans do not accrue interest while the student is enrolled at least half-time, during the grace period, or during deferment. The government covers this interest, so the loan balance does not increase.

In contrast, Federal Direct Unsubsidized Loans begin accruing interest immediately upon disbursement, regardless of enrollment status. This interest builds up while the borrower is in school, though payments are not typically required until after graduation or leaving school. Private student loans also typically begin accruing interest upon disbursement. Terms for private loans vary, so reviewing the loan agreement is important.

The Role of Grace Periods

A grace period is a defined timeframe after a borrower graduates, leaves school, or drops below half-time enrollment, during which loan payments are not required. For most federal student loans, this period typically lasts six months.

During the grace period, interest accrual depends on the loan type. For Federal Direct Subsidized Loans, interest does not accrue, and the loan balance remains unchanged. For Federal Direct Unsubsidized Loans, interest continues to accrue. Any unpaid interest on these loans will be added to the principal balance, a process known as capitalization, when the grace period ends. Private student loans may or may not include a grace period; if offered, interest typically accrues and often capitalizes at the end.

How Servicing Actions Affect Interest

Beyond initial accrual and grace periods, servicing actions impact interest. Deferment allows a temporary pause in loan payments due to specific circumstances like re-enrollment or economic hardship. For Federal Direct Subsidized Loans, interest does not accrue during deferment. For Federal Direct Unsubsidized Loans and private loans, interest continues to accrue, capitalizing at the end of the deferment period if unpaid.

Forbearance offers another temporary suspension or reduction of payments, typically for financial difficulty. Interest always accrues on all loan types—subsidized, unsubsidized, and private—during forbearance. This accrued but unpaid interest can lead to a higher total loan cost if it capitalizes.

Interest capitalization occurs when accrued but unpaid interest is added to the principal balance. This increases the total amount owed, and future interest is calculated on this new, larger principal, making the loan more expensive. Capitalization commonly happens at the end of a grace period for unsubsidized loans, or at the end of deferment or forbearance periods for unsubsidized and private loans. When federal student loans are consolidated, accrued interest may capitalize before consolidation, and interest on the new consolidated loan begins accruing immediately.