When Does Student Loan Interest Start Accruing?

Student loan interest represents the cost of borrowing money for educational expenses. This charge is calculated as a percentage of the outstanding loan balance, known as the principal. Interest on student loans typically begins accruing daily from a specific point, which varies depending on the loan type. Understanding when this accrual starts is important for managing the total amount repaid.

Understanding Interest Accrual

Student loan interest is generally calculated using a simple daily interest formula. This means that interest accumulates each day based on your current principal balance and the loan’s annual interest rate. For example, a $10,000 loan with a 5% annual interest rate would accrue approximately $1.37 in interest per day ($10,000 0.05 / 365). While interest accrues daily, it is typically added to your loan balance monthly.

A foundational distinction in student loans is between federal subsidized and unsubsidized loans, which determines when interest begins accruing. For federal unsubsidized loans and most private student loans, interest typically starts accruing immediately upon loan disbursement, even while the student is enrolled. Conversely, for federal subsidized loans, the government pays the interest during certain periods, so interest does not accrue for the borrower.

Accrual During Different Loan Phases

Interest accrual patterns differ significantly across various phases of a student loan’s lifecycle. While a student is enrolled in school at least half-time, interest on federal unsubsidized loans begins to accrue from the moment the loan funds are disbursed. However, for federal subsidized loans, the U.S. Department of Education covers the interest during in-school periods, preventing accrual for the borrower.

Following graduation, leaving school, or dropping below half-time enrollment, federal student loans typically enter a grace period, commonly six months long. Interest on unsubsidized federal loans continues to accrue throughout this grace period. For subsidized federal loans, the government continues to pay the interest during the grace period, so no interest accrues for the borrower.

Once the grace period ends, or immediately if there is no grace period, the loan enters the repayment phase. At this point, interest begins to accrue on all types of student loans, including both federal subsidized and unsubsidized loans, as well as private loans. The borrower becomes responsible for all accruing interest from the first day of the repayment period until the loan is fully satisfied.

Accrual During Loan Pauses

When borrowers temporarily pause their loan payments through deferment or forbearance, interest accrual varies. During an approved deferment, interest typically does not accrue on federal subsidized loans. The government covers this interest, preventing the loan balance from growing during deferment.

For federal unsubsidized loans and all private student loans, interest continues to accrue during deferment. If unpaid, this accrued interest is added to the principal balance at the end of the deferment period. This increases the total amount on which future interest is calculated.

In contrast to deferment, interest always accrues on all federal and private student loans during forbearance. Even though payments are paused, the loan balance will continue to grow due to accumulating interest during forbearance. Borrowers are responsible for all interest that accrues during forbearance, and typically this unpaid interest will capitalize at the end of the period.

Interest Capitalization

Interest capitalization is a process where unpaid accrued interest is added to the principal balance of a loan. When this occurs, the borrower pays interest on a larger principal, which increases the total cost of the loan over time. This can lead to a higher overall repayment and potentially larger monthly payments.

Capitalization occurs at specific points in the loan lifecycle. For unsubsidized federal loans, unpaid interest accrued during the grace period capitalizes when the loan enters repayment. Similarly, unpaid interest accrued on an unsubsidized loan during deferment capitalizes at the deferment’s end.

For all loan types, unpaid interest that accrues during forbearance typically capitalizes once the forbearance ends. Additionally, capitalization can occur if a borrower defaults on their loan or when they exit certain income-driven repayment plans. Paying interest as it accrues, when possible, can help minimize the impact of capitalization.