Student loan interest is the cost of borrowing money, set as a percentage of what you owe
The interest rate on a federal student loan is set by Congress and stays the same for the life of the loan. Private student loans have rates that vary by lender and your credit history. The interest you pay depends on three things: the loan amount, the interest rate, and how long you take to repay it. A higher rate or longer repayment period means you pay more total interest over time.
Federal loans issued in the 2024–2025 school year carry a 6.53% interest rate. This rate changes each year based on the 10-year Treasury note, so rates for loans issued in different years will differ. Private loan rates typically range from 4% to 14%, depending on the lender and whether you have a co-signer. The rate you receive on a private loan depends partly on your credit score and income.
Key Takeaways
- Federal student loan interest rates are set by Congress and remain fixed for the life of the loan, while private rates vary by lender and your creditworthiness.
- Interest accrues (builds up) differently depending on the loan type: unsubsidized loans accrue interest while you are in school, but subsidized loans do not.
- The total interest you pay over the life of the loan depends on the starting balance, the interest rate, and your repayment plan — a 10-year plan costs less in total interest than a 20-year plan.
- You can see your current interest rate and accrued interest by logging into your Federal Student Aid account or contacting your loan servicer.
How interest accrues on federal loans while you are in school
Subsidized loans do not accrue interest while you are enrolled at least half-time. The federal government pays the interest during school and during the grace period after graduation. This means you owe only the original loan amount when repayment begins.
Unsubsidized loans accrue interest from the moment the money is disbursed, even while you are in school. You are not required to pay this interest while studying, but it adds to what you owe. When repayment begins, you can pay the accrued interest or let it capitalize — meaning it gets added to your loan balance and you then pay interest on the interest.
Graduate and professional students can only take out unsubsidized loans, so interest begins accruing immediately. Parent PLUS loans also accrue interest from disbursement.
What happens to interest during repayment
Once you enter repayment, your monthly payment covers both principal (the original amount borrowed) and interest. Early in repayment, most of your payment goes toward interest; later, more goes toward principal. This is why paying extra toward principal early can save significant money over the life of the loan.
Interest continues to accrue daily on the unpaid balance. If you miss a payment or pay less than the full amount due, the unpaid interest capitalizes at the end of the month, meaning it gets added to your principal balance. You then owe interest on that larger amount going forward.
Some repayment plans, such as income-driven plans, may result in unpaid interest capitalizing annually. If your monthly payment under an income-driven plan does not cover all the interest that accrued that month, the difference capitalizes once per year.
How your repayment plan affects total interest paid
The Standard Repayment Plan requires fixed monthly payments over 10 years. This plan results in the lowest total interest because you repay the loan fastest.
Extended and income-driven repayment plans spread payments over 20 to 25 years. Your monthly payment is lower, but you pay substantially more interest overall because the loan balance sits longer. For example, on a $30,000 loan at 6.53%, the Standard plan might cost roughly $3,500 in total interest, while a 25-year income-driven plan could cost roughly $8,000 or more in total interest.
Income-driven plans also have forgiveness provisions: any remaining balance after 20 or 25 years of payments is forgiven. However, forgiven amounts may be treated as taxable income in the year of forgiveness.
Private student loan interest rates and how they differ
Private lenders set their own rates based on market conditions and your creditworthiness. Most private loans have variable or fixed rates. A fixed-rate loan keeps the same interest rate for the entire repayment period. A variable-rate loan starts at one rate and can change annually, usually tied to a market index like the prime rate.
Private loans typically do not offer the same protections as federal loans. There is no grace period after graduation, and interest usually begins accruing immediately. Many private lenders require you to begin repayment while still in school, though some offer in-school deferment options.
Private loans also do not offer income-driven repayment plans or forgiveness programs. If you cannot pay, your options are limited to forbearance or deferment, which pause payments but allow interest to continue accruing.
Where to find your current interest rate and accrued interest
For federal loans, log into studentaid.gov using your Federal Student Aid ID. Your account shows each loan, its interest rate, current balance, and accrued unpaid interest. You can also contact your loan servicer directly — the servicer's name appears on your loan statements and on your studentaid.gov account.
For private loans, log into your lender's website or call the customer service number on your loan statement. Private lenders are required to provide your interest rate and current balance, but the format and detail vary by company.
If you are unsure who your servicer is, visit studentaid.gov and sign in. The site lists all your federal loans and the servicer managing each one.
How interest affects your total loan cost
Interest is the price of borrowing. On a $20,000 loan at 6.53% over 10 years, you pay roughly $2,200 in interest. On the same loan over 20 years, you pay roughly $4,600 in interest — more than double. On a $40,000 loan, those numbers roughly double again.
This is why the repayment plan you choose matters significantly. Paying more per month shortens the loan and reduces total interest. Even small extra payments toward principal early in repayment can save hundreds or thousands of dollars by the time the loan is paid off.
Frequently Asked Questions
Can I deduct student loan interest on my taxes?
Yes. You can deduct up to $2,500 in student loan interest paid during the tax year, even if you do not itemize deductions. This applies to federal and private loans. You must have been legally obligated to pay the interest, and your income must fall below certain limits (the limits vary by filing status and change annually).
What is the difference between simple and compound interest on student loans?
Federal student loans use simple interest, which means interest is calculated only on the unpaid principal balance, not on previously accrued interest — unless that interest capitalizes. Private loans may use compound interest, where interest accrues on both the principal and any unpaid interest. Check your loan documents or contact your lender to confirm which method applies.
Does paying off my loan early save me money on interest?
Yes. Paying extra toward principal reduces the balance faster, which means less interest accrues over time. There are no prepayment penalties on federal loans, so you can pay extra without fees. Some private loans may have prepayment penalties — check your loan agreement before paying extra.
What happens to interest if I defer or forbear my loans?
On subsidized federal loans, the government covers interest during deferment but not during forbearance. On unsubsidized and private loans, interest accrues during both deferment and forbearance. Unpaid interest typically capitalizes when the deferment or forbearance period ends, increasing your loan balance.
How do income-driven repayment plans handle interest?
Your monthly payment is calculated based on your income and family size, not on the interest owed. If your payment does not cover all the interest that accrued that month, the unpaid portion capitalizes once per year. Over time, this can increase your total loan balance even as you make payments.