Which Student Loan Does Not Accrue Interest During School?
Explore student loan options that prevent interest from accruing while you are in school, optimizing your education financing.
Student loans commonly accrue interest from the moment funds are disbursed, increasing the total amount owed over time. However, specific loan types exist that offer a significant financial advantage by not accumulating interest while the student is enrolled in school.
Direct Subsidized Loans
The primary federal student loan that does not accrue interest while a student is in school is the Direct Subsidized Loan. These loans, sometimes referred to as Subsidized Stafford Loans, are a form of federal aid provided by the U.S. Department of Education. Direct Subsidized Loans are specifically available to undergraduate students who demonstrate financial need. The federal government pays the interest on these loans during certain periods, which offers a considerable benefit to the borrower.
Eligibility for Direct Subsidized Loans
Eligibility for Direct Subsidized Loans is determined primarily by financial need, which is assessed through the Free Application for Federal Student Aid (FAFSA®). The FAFSA collects financial information to calculate a student’s Student Aid Index (SAI), a number that schools use to determine the student’s financial need. A lower SAI indicates a greater demonstrated need for assistance.
Beyond financial need, other requirements must be met. Applicants must be undergraduate students, as graduate and professional students are generally not eligible for new Direct Subsidized Loans. Students must also be U.S. citizens or eligible non-citizens and maintain satisfactory academic progress (SAP) as defined by their educational institution. Enrollment at least half-time in an eligible program at a participating school is also a prerequisite for receiving these funds. Satisfactory academic progress typically involves maintaining a certain grade point average and completing a percentage of attempted credits within a specified timeframe.
Interest Accrual and Repayment Details
Interest on Direct Subsidized Loans does not accrue while the student is enrolled at least half-time, during the six-month grace period that begins after leaving school or dropping below half-time enrollment, and during approved deferment periods. During these times, the U.S. Department of Education covers the interest. This means the loan balance does not increase due to interest during these specific periods.
Once these periods end, such as after the grace period concludes, interest begins to accrue daily on the outstanding principal balance. Repayment of Direct Subsidized Loans typically begins after the six-month grace period. Borrowers can choose from various repayment plans, including Standard, Graduated, and Income-Driven Repayment plans, which are designed to accommodate different financial situations. It is important to note that while interest does not accrue during deferment for subsidized loans, it typically does during periods of forbearance.
Applying for Federal Student Aid
The process of applying for federal student aid, including Direct Subsidized Loans, begins with obtaining an FSA ID. This FSA ID is a unique username and password that serves as a legal signature for accessing U.S. Department of Education online systems. It is used to complete and sign the Free Application for Federal Student Aid (FAFSA®) form.
After obtaining an FSA ID, the next step involves completing and submitting the FAFSA form online at studentaid.gov. The FAFSA opens annually on October 1st, and submitting it early is recommended as some aid is awarded on a first-come, first-served basis. Once processed, a Student Aid Report (SAR) is generated, summarizing the FAFSA information, which should be reviewed for accuracy. Subsequently, schools will send financial aid offers based on the FAFSA data.
If a loan is offered and accepted, first-time federal student loan borrowers must complete entrance counseling and sign a Master Promissory Note (MPN). The MPN is a legal document promising to repay the loan and outlining its terms and conditions. Entrance counseling ensures borrowers understand their responsibilities and the terms of their loans before funds are disbursed.