Which Loan Accrues Interest While in School?

Student loans serve as a common financial tool for individuals pursuing higher education, providing funds that must be repaid. Unlike some grants or scholarships, these funds come with an added cost: interest. Understanding how this interest accrues, particularly while still enrolled in school, becomes important for managing overall loan debt. The timing of interest accrual varies significantly between different loan types, directly impacting the total amount owed.

Federal Student Loans and Interest Accrual

Federal student loans are categorized by how interest is handled during enrollment. Direct Subsidized Loans, available to undergraduate students demonstrating financial need, generally do not accrue interest for the borrower while they are enrolled in school at least half-time, during a grace period after leaving school, or during periods of deferment. The government pays the interest during these specified periods, meaning the loan balance does not increase from accrued interest.

In contrast, Direct Unsubsidized Loans, accessible to undergraduate and graduate students regardless of financial need, begin accruing interest immediately upon disbursement. The borrower is responsible for all interest that accumulates from disbursement, even while still attending classes. Interest continues to grow throughout the in-school period, grace period, and any deferment or forbearance.

Federal PLUS Loans, which include Parent PLUS Loans for parents of undergraduate students and Grad PLUS Loans for graduate or professional students, also accrue interest from disbursement. Borrowers of PLUS Loans are responsible for all accrued interest, similar to unsubsidized loans. Although payment may be deferred while the student is in school, interest continues to accumulate on the loan balance.

Private Student Loans and Interest Accrual

Private student loans are financial products offered by banks, credit unions, and other private lenders, distinct from federal loan programs. A key characteristic of private student loans is that interest almost universally begins to accrue immediately upon the loan’s disbursement. This means interest starts accumulating on the principal balance as soon as funds are disbursed, regardless of the student’s enrollment status.

While some private lenders may offer options to defer principal payments during the in-school period, interest typically continues to accumulate during such deferments. The terms and conditions for private loans, including interest accrual and repayment options, vary among lenders. It is important for borrowers to carefully review their specific loan agreements to understand when interest begins to accrue and how it is managed while in school.

Understanding Interest Accrual and Capitalization

Interest accrual is the process by which interest accumulates on a loan balance over time. For student loans, interest typically accrues daily, with a small amount added daily. This daily calculation contributes to the overall interest owed. The total amount of accrued interest can become significant, especially over several years of study.

Capitalization occurs when unpaid accrued interest is added to the loan’s principal balance. This process increases the total amount owed, and subsequently, future interest calculations are based on this new, larger principal amount. Capitalization commonly takes place at specific times, such as when a loan enters repayment, at the end of a grace period, or after a period of deferment or forbearance. When interest capitalizes, the borrower pays interest on interest, leading to a higher total repayment amount.

Managing Interest During School

For student loans that accrue interest while the student is still enrolled, such as federal unsubsidized loans, PLUS loans, and most private loans, borrowers have options to manage this accumulating interest. One effective strategy is to make interest-only payments during the in-school period. Even small, consistent payments can mitigate loan balance growth.

Paying accrued interest while in school helps prevent or reduce capitalization. By preventing interest from being added to the principal balance, borrowers can lower the total amount they will repay over the life of the loan. This proactive approach leads to long-term savings and a smaller loan balance when formal repayment begins.