How interest accrues on your student loans
Student loan interest is calculated daily based on your outstanding balance, the interest rate attached to that loan, and the number of days since your last payment or since interest last accrued. The formula is straightforward: multiply your loan balance by the annual interest rate, divide by 365, then multiply by the number of days that have passed. That daily amount adds up each day until you make a payment or until the interest capitalizes — meaning it gets added to your principal balance and starts earning interest itself.
The timing of when interest starts accruing depends on the loan type. Federal subsidized loans do not accrue interest while you are in school at least half-time, during your grace period after graduation, or during deferment. Federal unsubsidized loans and PLUS loans accrue interest from the moment they are disbursed, even while you are still in school. Private student loans follow their lender's terms, which vary widely.
Once you enter repayment, interest accrues every single day until the loan is paid off. If you make a payment, that money goes first to any accrued interest, then to principal. If you do not make a payment and interest capitalizes, your new balance becomes higher, and future interest accrues on that larger amount.
Key Takeaways
- Interest accrues daily on most student loans using a simple formula: balance multiplied by annual rate, divided by 365, multiplied by days elapsed.
- Federal subsidized loans do not accrue interest while you are in school or during grace periods, but unsubsidized and PLUS loans accrue interest immediately.
- When interest capitalizes — gets added to your principal — your loan balance grows and future interest accrues on the larger amount.
- Payments cover accrued interest first, then reduce your principal, so making extra payments toward principal can significantly reduce total interest paid.
- Income-driven repayment plans may cause unpaid interest to capitalize annually, increasing your balance even if you are making on-time payments.
The difference between subsidized and unsubsidized federal loans
Subsidized loans are subsidized because the federal government pays the interest for you during certain periods. While you are enrolled at least half-time, the government covers the daily interest that accrues. During your six-month grace period after graduation or leaving school, the government still pays it. If you enter deferment (a temporary pause on payments due to hardship or other circumstances), the government continues to pay. This means your balance does not grow during these periods.
Unsubsidized loans accrue interest from disbursement onward, and you are responsible for all of it. If you do not pay the accrued interest while in school, it capitalizes when you enter repayment, meaning it gets added to your principal. A $5,000 unsubsidized loan at 6.33% interest that accrues for four years of school can have $1,300 or more in unpaid interest capitalized at graduation, so your actual balance becomes $6,300 before you make your first payment.
PLUS loans (Parent PLUS and Grad PLUS) are always unsubsidized and accrue interest from the date they are disbursed. Interest capitalizes when the loan enters repayment.
How interest rates are set and what they mean for your payment
Federal student loan interest rates are set by Congress and are the same for all borrowers in a given year, though rates change annually for new loans. As of 2024, federal undergraduate loans carry a fixed rate; graduate loans and PLUS loans carry different fixed rates. These rates do not change over the life of the loan once it is disbursed.
Private student loans have rates set by the lender based on your credit score, income, and other factors. Private rates can be fixed or variable. A variable rate changes periodically — often annually — based on a market index plus the lender's margin. This means your interest accrual can increase or decrease without warning.
A higher interest rate means more money accrues each day. On a $10,000 loan at 4% annual interest, you accrue about $1.10 per day. On the same loan at 8%, you accrue about $2.20 per day. Over four years of school without payments, that difference adds up to roughly $5,200 in additional interest.
What happens when you do not pay accrued interest
If you do not pay interest as it accrues, it capitalizes — gets added to your principal balance. Capitalization happens at specific points: when you leave school, when your grace period ends, when you enter repayment, or when you exit deferment or forbearance. Once capitalized, that interest is now part of your balance, and future interest accrues on the larger amount.
This creates a compounding effect. If $2,000 in interest capitalizes on a $20,000 loan, your new balance is $22,000. At 6% interest, that extra $2,000 in principal will generate an additional $1,200 in interest over the life of a standard 10-year repayment plan — interest on top of the interest you already did not pay.
Income-driven repayment plans can trigger capitalization annually. If your payment under an income-driven plan does not cover all the accrued interest for that month, the unpaid interest capitalizes at the end of the year. This can happen even if you are making your required payment on time.
How your repayment plan affects interest accrual
The repayment plan you choose determines how much you pay each month, which directly affects how much interest you pay over time. A standard 10-year plan has fixed monthly payments and you pay the least total interest because you pay down principal faster. An income-driven plan (PAYE, REPAYE, IBR, or ICR) bases your payment on your income, which can be as low as $0 if your income is very low. Lower payments mean interest accrues longer and you pay more total interest, but you may have unpaid interest forgiven if you reach the end of the plan term.
Under income-driven plans, if your monthly payment does not cover all the accrued interest, the unpaid portion capitalizes annually. On REPAYE, the government subsidizes half of unpaid interest while you are in school or during deferment, but once you are repaying, unpaid interest still capitalizes. This means your balance can grow even though you are making on-time payments.
If you extend your repayment period — say, from 10 years to 20 or 25 years — you pay less each month but accrue interest for longer, so you pay significantly more in total interest. A $30,000 loan at 6% costs about $3,300 in interest over 10 years but about $9,000 over 25 years.
How extra payments reduce your total interest
When you make a payment larger than your required monthly amount, the extra goes toward principal, not interest. This immediately reduces the balance on which future interest accrues. Even small extra payments compound over time.
On a $20,000 loan at 6% interest on a 10-year standard plan, your required payment is about $222 per month and you pay roughly $6,600 in total interest. If you pay an extra $50 per month, you pay off the loan in about eight years and pay roughly $4,800 in total interest — a savings of nearly $1,800. The earlier in the loan term you make extra payments, the more interest you save, because that money stops accruing interest immediately.
Some borrowers make a lump-sum payment toward principal when they receive a tax refund or bonus. This has the same effect: it reduces the balance and all future interest accrues on the smaller amount. There are no penalties for paying off a federal student loan early, and most private loans also allow early repayment without penalty.
Interest capitalization and how to avoid it
Capitalization happens automatically at certain transition points, but you can prevent or reduce it by paying accrued interest before it capitalizes. If you are in school and have unsubsidized loans, paying even small amounts toward interest keeps it from building up. When you graduate, if you have accrued interest, you can pay it before entering repayment to prevent capitalization.
If you are in deferment or forbearance, interest still accrues on unsubsidized and PLUS loans. Paying interest during these periods prevents it from capitalizing when you resume payments. Some borrowers in financial hardship cannot afford to do this, and that is a real constraint — but if you have any ability to pay, even $25 per month toward interest, it reduces what capitalizes.
On income-driven repayment plans, capitalization happens annually if your payment does not cover accrued interest. You cannot prevent this entirely if your income is very low, but you can monitor your loan servicer's statements to see whether unpaid interest is accumulating and plan for it.
Frequently Asked Questions
Does interest accrue on federal student loans during the grace period?
Interest accrues on unsubsidized and PLUS loans during the grace period, but not on subsidized loans. The federal government pays interest on subsidized loans during this time. If you do not pay the accrued interest on unsubsidized loans before the grace period ends, it capitalizes when repayment begins.
What is the difference between fixed and variable interest rates?
A fixed rate stays the same for the life of the loan. A variable rate changes periodically, usually annually, based on market conditions. Federal loans have fixed rates. Private loans may offer either, but variable rates can increase significantly, raising your monthly payment and total interest paid.
Can I pay just the interest on my student loans?
Yes, you can pay only accrued interest if you want to, and this is common while in school or during grace periods. Paying interest-only prevents capitalization. Once you enter repayment, your required payment typically covers both interest and principal, but you can always pay more toward principal.
How much interest will I pay over the life of my loan?
Total interest depends on your balance, interest rate, and repayment plan. A loan calculator from your servicer or the Federal Student Aid website can show you an estimate. The longer your repayment period, the more interest you pay; the higher your interest rate, the more interest you pay; and the more you pay toward principal early, the less total interest you pay.
What happens if I miss a payment?
Interest continues to accrue daily. If you miss a payment, contact your servicer immediately to discuss options like deferment, forbearance, or an income-driven plan. The longer you go without paying, the more interest accrues and the more likely it is to capitalize, increasing your balance.