Despite the standard repayment plan lasting ten years on federal student loans, most borrowers pay back their debt over 16 to 19 years. Why does it take so long? Student loan borrowers often need more time because of the interest amount that builds on their loan, adding to their overall debt. When does interest start on student loans? Depending on the type of student loan you have, interest starts accruing right away, so it can make sense to make payments before they’re required.
Federal Student Loans: When Does Interest Start?
Federal student loans are the most commonly used form of loans for college. In fact, the federal government owns 92% of outstanding student loan debt. Federal student loans are recommended because of their relatively low-interest rates and favorable repayment. They also usually allow you to defer payments until after you leave school and your grace period ends. Because of federal deferments and grace periods, a common misconception is that federal loans don’t accrue interest while you’re in school or during the grace period. However, for most forms of federal loans, that’s not the case. There are three main types of federal loans used to pay for college; the interest accrued depends on your loan type.
- Subsidized
- PLUS
- Unsubsidized
Unsubsidized
Unsubsidized Direct loans are for undergraduate and graduate students. Unlike subsidized loans, the borrower is responsible for all interest that accrues on the loan. Interest begins accruing immediately after the loan is disbursed. While payments aren’t due while you’re in school or during the grace period, interest does accrue, causing your balance to grow.
PLUS Loans
PLUS loans are for graduate students and parents of undergraduate students. Unlike other federal loans, PLUS loans have no limits on how much you can borrow per year or over your lifetime. With PLUS loans, payments against the principal and interest begin right after the loan is disbursed. However, parents and graduate students can elect to defer their payments until after the student leaves school and for the grace period. When does interest start on student loans for parent borrowers or graduate students? Whether you decide to make payments while in school or not, interest begins accruing immediately. The interest is capitalized, meaning it’s added to the loan balance.
Subsidized Loans
Subsidized student loans are for undergraduate students that display significant financial needs based on the FAFSA. Unlike other loans, borrowers get help with the interest. With federal Direct subsidized loans, the government covers the accrued interest while the student is in school and for six months after they graduate, leave early, or drop below half-time status.
When Do Private Loans Start Accruing Interest?
While the U.S. Department of Education issues federal loans, private loans are issued by banks, credit unions, and online lenders. Each lender charges its own rates and fees, and repayment options can vary between lenders. Typically, interest on private student loans begins immediately after the loan disbursement date. Some lenders allow students to defer payments or make reduced payments while they’re in school and during a period after graduation, but the student can also opt to make payments while in school to reduce interest charges.
5 Ways to Reduce Interest Charges
When does interest start on student loans? As you’ve read above, interest starts to accrue on most student loans immediately after disbursement. To reduce the amount of interest that accrues and save money, you can use these tips:
- Make payments while you’re in school: With federal and some private student loans, you can defer payments while in school and for six months after graduating. However, you can reduce interest charges by making payments while still enrolled. Even paying a relatively small amount, such as covering the accrued interest or a flat $25 per month, can help you save money over time.
- Sign up for automatic payments: Some loan servicers offer an interest rate discount if you sign up for automatic payments. You can reduce your interest rate by 0.25%, and a lower rate can reduce the amount of interest that accrues.
- Pay more than the minimum: If your budget allows it, pay more than the minimum required. Even increasing your monthly payment by $50, $25, or $10 per month can make a significant difference. Less interest will accrue, and you can pay off your loans months or even years faster.
- Make extra payments toward the highest interest rate first: If you have multiple student loans and aren’t sure how to apply extra payments, a good rule of thumb is to target the account with the highest interest rate first. This approach — known as the debt avalanche method — will help you save more money and get rid of your debt faster.
- Consider student loan refinancing: If you have student loans with high-interest rates, you can use student loan refinancing to potentially get a lower rate and reduce the amount of interest that accrues on your debt. Just keep in mind that refinancing federal student loans has some major drawbacks since you’ll lose benefits like eligibility for income-driven repayment plans or loan forgiveness.
Tip: Use the student loan refinancing calculator to see how much you could save by refinancing your debt.
