Interest is money you pay the lender on top of what you borrowed

When you borrow money for school, you owe back the amount you borrowed plus interest. Interest is the cost of borrowing — it's how the lender makes money. The amount of interest you pay depends on three things: how much you borrowed, what interest rate you were given, and how long you take to pay it back.

Federal student loans and private student loans calculate interest differently. Federal loans use a simple interest formula set by Congress or your loan agreement. Private loans vary by lender. Understanding which type you have and how the math works helps you see what you'll actually owe by the time you finish paying.

Key Takeaways

  • Interest accrues (builds up) daily on most federal loans while you're in school, but you don't pay it until after you graduate or drop below half-time enrollment.
  • The interest rate on federal loans is fixed — it stays the same for the life of the loan — while private loan rates can be fixed or variable.
  • Unsubsidized loans charge interest from the day you take them out; subsidized loans don't accrue interest while you're in school full-time.
  • You can calculate what you'll owe using the simple interest formula: (Loan Balance × Interest Rate × Time in Years) ÷ 365 = Daily Interest, then multiply by the number of days.

How federal student loan interest rates are set

Congress sets the interest rate for federal student loans each year. The rate is the same for all borrowers taking out that type of loan in that year. For example, all Direct Unsubsidized Loans issued in 2024 have the same rate; all issued in 2025 have a different rate. The rate does not change after you receive your loan — it stays fixed for the entire time you're paying it back.

You can find your loan's interest rate on your loan documents or by logging into your Federal Student Aid account at studentaid.gov. The rate is listed as a percentage — for instance, 6.53% or 7.08%. This percentage is what you'll pay each year on the outstanding balance.

The difference between subsidized and unsubsidized loans

With a subsidized loan, the federal government pays the interest while you're in school at least half-time. This means interest does not build up during your enrollment period. Once you graduate or drop below half-time status, interest starts accruing and you begin repaying it.

With an unsubsidized loan, you are responsible for all interest from the moment the loan is disbursed. Interest accrues while you're in school. You have two choices: pay the interest as it builds up, or let it capitalize (get added to your loan balance). If you don't pay it, the unpaid interest gets added to your principal, and then you pay interest on that larger amount — which costs you more over time.

Parent PLUS loans and private loans are almost always unsubsidized, meaning interest accrues immediately.

How to calculate what interest will cost you

The formula for simple interest is straightforward:

(Loan Balance × Annual Interest Rate × Time in Years) ÷ 365 = Interest Owed

Here's a concrete example. You borrow $10,000 at 6% interest. After one year, the interest owed is: ($10,000 × 0.06 × 1) ÷ 365 = $16.44 per day, or about $6,000 per year. If you're calculating interest for a specific number of days — say, 90 days while you're in school — multiply the daily amount by 90.

Most loan servicers calculate interest daily and add it to your balance monthly. When you make a payment, part goes to interest that's already accrued, and the rest reduces your principal (the amount you originally borrowed). As your principal shrinks, the daily interest amount also shrinks, because interest is calculated on what you still owe.

What happens to interest after you graduate

Once you leave school, your loan enters repayment. Any unpaid interest on unsubsidized loans capitalizes — it gets added to your principal. This is important because you'll now pay interest on a larger balance. For example, if you borrowed $10,000 unsubsidized and $1,200 in interest accrued while you were in school, your new balance becomes $11,200, and interest calculations start from there.

Your monthly payment is set based on your repayment plan. Standard repayment is 10 years. Income-driven plans stretch payments over 20 or 25 years. The longer your repayment period, the more total interest you pay, because interest keeps accruing on the remaining balance for more years.

Private loan interest rates and how they differ

Private student loans are issued by banks, credit unions, and other lenders, not the federal government. Interest rates vary by lender and by your credit score. Some private loans have fixed rates (the rate stays the same), and some have variable rates (the rate changes based on market conditions, usually once per year).

Private loans often charge interest while you're in school, with no grace period. Some lenders let you defer payments until after graduation, but interest still accrues. Private loans also typically have higher interest rates than federal loans, especially if your credit is limited. Always check the promissory note — the contract you sign — to see when interest starts and how it's calculated.

How to reduce the interest you pay

Pay interest while you're in school if you can. Even small payments on unsubsidized loans prevent interest from capitalizing and reduce what you owe after graduation. If you can't pay the full interest, pay what you can — every dollar reduces the amount that gets added to your principal.

After graduation, make extra payments toward principal whenever possible. When you pay more than your monthly payment requires, the extra goes directly to principal, which immediately lowers the amount interest is calculated on. Over the life of a 10-year loan, extra principal payments can save thousands in interest.

Some federal repayment plans result in lower total interest than others. Standard repayment (10 years) costs less in total interest than income-driven plans (20–25 years), because you're paying off the loan faster. However, income-driven plans have lower monthly payments, which matters if your income is low right now.

Frequently Asked Questions

Does interest accrue on federal loans during the grace period?

It depends on the loan type. Subsidized loans do not accrue interest during the six-month grace period after graduation. Unsubsidized loans continue to accrue interest during the grace period, though you don't have to pay it yet. Any unpaid interest capitalizes when repayment begins.

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, as long as your income is below a certain threshold. This is a federal tax deduction, not a credit. Check the IRS website or speak with a tax professional about your specific situation, as income limits change yearly.

What's the difference between APR and interest rate on student loans?

The interest rate is the percentage you pay on the loan balance. APR (annual percentage rate) includes the interest rate plus any fees. On federal student loans, there are no origination fees, so the interest rate and APR are the same. Private loans often have origination fees, so the APR is higher than the stated interest rate.

If I pay off my loan early, do I save on interest?

Yes. Interest accrues daily, so the sooner you pay off the loan, the fewer days interest has to build up. Paying off a 10-year loan in five years means you stop paying interest after five years instead of ten. There are no prepayment penalties on federal student loans, so you can pay extra at any time without a fee.

How does income-driven repayment affect how much interest I pay?

Income-driven plans lower your monthly payment, but they extend your repayment period to 20 or 25 years. Because interest accrues for longer, you pay more total interest over the life of the loan — sometimes significantly more. However, if your income is low, the lower payment may be necessary. Some income-driven plans forgive remaining balance after 20–25 years, which can offset the extra interest.