When Do Student Loans Start to Accrue Interest?

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Many students rely on loans to fund their college education. Each year, approximately 30 to 40% of undergraduate students take out federal student loans. If you are one of the many who have borrowed money, it's important to understand how your loans work and when your student loans will begin to accrue interest. 

Understanding when and how interest accrues on your student loans is crucial for effective financial planning. Since the interest rates directly impact the total amount you'll repay over the life of your loan, knowing how and when the interest goes into effect will help you make informed decisions about loan types, repayment¹ strategies, and whether to make payments while still in school. 

When do student loans start to accrue interest?

The answer to this question depends on several factors, primarily the type of loan you have - federal or private - as well as the specific terms of your loan. Understanding when interest begins to accrue is crucial for managing your student debt effectively. 

Other factors influencing interest accrual are:

Loan type: Federal unsubsidized loans and private loans typically start accruing interest as soon as they're disbursed. However, for federal subsidized loans, the government pays the interest while you're in school at least half-time, during your grace period, and during deferment periods.

Enrollment status: Most federal loans offer a grace period of 6 months after you graduate, leave school, or drop below half-time enrollment before you must begin repayment. Earnest offers a 9-month grace period². 

Repayment plan: The repayment plan you choose can affect how interest accumulates, especially for federal loans.

Additionally, it's important to note that during periods of forbearance, interest generally continues to accrue on all types of student loans. 

Two types of student loans: Federal and Private 

When it comes to student loans, there are two options for borrowers, federal and private. Federal student loans are financial aid options offered by the U.S. Department of Education to assist students in covering qualified educational expenses, including tuition, fees, textbooks, and living costs.

Many borrowers turn to private student loans from lenders such as  Earnest after exhausting their federal student loan options and other financial aid provided through Free Application for Federal Student Aid (FAFSA). Unlike federal loans, which are government-funded, private student loans are offered by banks, credit unions, and other financial institutions.

Federal Loans: Interest Accrual

Federal student loans are available in three main types: subsidized, unsubsidized loans and PLUS loans. 

Direct Subsidized Loans are offered to undergraduate students who demonstrate financial need. With these loans, the government pays the interest while the borrower is in school, during the grace period, and during deferment periods. This makes Direct Subsidized Loans an attractive, low-cost option for eligible students.

Direct Unsubsidized Loans are available to both undergraduate and graduate students regardless of financial need. For these loans, the borrower is generally responsible for paying the interest during all periods. This wider availability makes them accessible to a larger group of students.

Direct PLUS Loans, also known as Parent PLUS Loans when taken out by parents, are federal loans available to parents of dependent undergraduate students and to graduate or professional students. While not based on financial need, they may require a credit check. PLUS Loans typically have higher interest rates than other federal loans but offer parents flexibility in financing their child's education expenses.

In terms of when interest starts to accrue, most federal student loans begin to accrue interest as soon as they are disbursed. However, Direct Subsidized Loans are an exception to this rule. For these loans, the government covers the interest while the student is enrolled at least half-time, during the six-month grace period after leaving school, and during any periods of deferment.

Private Loans: Interest Accrual

Typically with private student loan³ lenders, your loans will start accruing as soon as the loan is disbursed, just like with federal loans. However, the specifics can vary depending on the lender and the terms of your loan. 

Depending on your lender and loan terms interest interest may still accrue on loans even if a borrower is in a grace period or deferment. This means that by the time you start making loan payments, your loan balance could be higher than the amount you originally borrowed. 

Smart Strategies to Manage Student Loan Interest

As a student loan borrower, understanding how to manage interest accrual is crucial for your financial health. Here are some effective tips to help you stay on top of your student loan interest:

Making interest payments while in school

One of the most impactful ways to manage interest is to start making payments while you're still in school. Here's why:

• Unsubsidized loans begin accruing interest immediately after disbursement.

• Even small payments can significantly reduce the total interest you'll pay over the life of the loan.

• You'll establish good financial habits early on.

Pro tip: Consider setting up automatic monthly payments, even if it's just $25 or $50. Every bit helps!

Choose the right repayment plan

Selecting an appropriate federal student loan repayment plan can make a big difference in how interest affects your loan:

• Income-driven repayment* plans can lower your monthly payments but may lead to more interest accrual over time.

• Standard repayment plans often result in higher monthly payments but less overall interest.

• Graduated plans start with lower payments that increase over time, which can be helpful if you expect your income to grow.

Analyze your financial situation and career prospects to choose the plan that best balances affordability with interest management.

* As a result of ongoing court actions, the terms of some Income-Driven Repayment (IDR) plans, including the SAVE plan, may be subject to change. Please refer to studentaid.gov for the current status of these plans

Consider Refinancing with Earnest

Refinancing your student loans can be a game-changer when it comes to managing interest. Here's how refinancing with Earnest can help:

• Potentially lower interest rates, saving you money over the life of your loan⁴

• Customized repayment terms that fit your financial goals

• The option to choose between fixed and variable rates

• No fees for origination, prepayment, or extra payments

At Earnest, we understand that every borrower's situation is unique. Plus, our flexible repayment options allow you to design a plan that works for your budget and lifestyle. Check your rate to see how much you could save in under 2 mins. 

Remember, the key to managing student loan interest is to be proactive. Whether you're making early payments, choosing the right repayment plan, or refinancing, understanding interest rates and planning your payments will help you stay in control of your financial future. 

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

¹ As was announced by the U.S. Department of Education (ED), federal student loans have resumed accruing interest starting September 1, 2023, and federal student loan payments were reinstated starting in October. Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan. See https://studentaid.gov/ for more information.

² Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school. 

³ Before applying for private student loans, it’s best to maximize your other sources of financial aid first.  It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grants, and work-study opportunities.  2) Next, fill out a FAFSA(R) form to apply for federal student loans.  Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if you're struggling with your payments.  3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2.  For more information, visit the Department of Education website at https://studentaid.gov/.

⁴ Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.