When Do Student Loans Start Accruing Interest

When Do Student Loans Start Accruing Interest

BIG Ideas:

  • There are two types of student loans: federal loans from the government and private loans from banks, credit unions, and non-profits.
  • Interest accrues on both federal and private loans when funds are disbursed.
  • Making interest payments while the student is in school can help you reduce the total amount you’ll have to pay. 

You’re getting ready for college. That’s a huge step in the journey to adulthood. Along the way, you’ll need to decide on the school that’s the perfect fit, fill out applications, and of course, start buying some dorm essentials.

You’ll likely need something else that’s important – a student loan to help you meet the soaring cost of college today. But before you apply, you should be able to answer a few important questions:

What are the types of loans? 

How does interest work? 

When does interest start on student loans?

We can help you understand the loan types and federal and private student loan interest. Read on to learn more.

Student Loans 101

There are two types of student loans: federal loans from the government and private loans from banks, credit unions, and non-profit lenders (like Brazos). Though private and federal loans differ in many ways, they have something in common: They both charge interest that accrues as soon as funds are made available to you. So, you’ll be charged interest from day 1.

There is, however, a caveat depending on the type of federal loan you have; with a Direct Subsidized Loan, the government pays the accrued interest while the student is enrolled in school at least half-time. But with a Direct Unsubsidized Loan or private student loan, you’ll be responsible for that interest.

How Interest Works

Interest is essentially the fee lenders charge you for borrowing money. It’s expressed as a percentage rate applied to the unpaid principal balance of your loan.

All federal loans offer fixed interest rates, which means your rate and payment will not change for the term of your loan. That’s a great benefit that makes it easier to budget for your loan payment.

Federal student loan interest also accrues/grows daily. Here’s a formula to help you calculate the amount of daily interest.

[Annual interest rate / the number of days in a year] x [unpaid principal balance]

So, if you owe $25,000 on a student loan with an annual fixed interest rate of 6.39% the amount of daily interest would be $4.37 calculated as follows:

[.0639/365] x 25,000 = $4.37

How Your Repayment Plan Impacts Interest Paid

With federal loans, you can defer payments for up to 6 months after graduation or while the student is in school at least half-time.

Keep in mind that even though payments are deferred, interest will continue to accrue on your loans from the day the loan is disbursed, unless you have a Direct Subsidized Loan (where the government pays it for you).

If you don’t have such a loan, the interest will accrue and be added to your principal balance, which is known as capitalized interest. That means you’ll owe more than you borrowed and pay more interest.

With a Standard, Graduated, or Extended Repayment Plan, accrued interest is factored into your monthly payment.

However, if you have an Income-Driven Repayment Plan, defer payments, or stop making them altogether after graduation, accrued interest will continue to be added to the amount you owe.

There is a way to reduce interest on non-subsidized loans: You make interest-only payments or pay both principal and interest while the student is in school.

Understanding Interest on Private Student Loans

Unlike federal loans that offer fixed interest rates, interest on private student loans may be fixed or variable. Variable rates are tied to an index that may go up or down depending on the rate environment. So, if the index goes up, your rate and monthly payment will increase. Bummer!

Interest on private student loans also begins accruing when funds are disbursed.

However, unlike federal loans, rates and terms on private loans may vary from lender to lender. Many private lenders, including Brazos, offer repayment plans that allow you to defer payments until after graduation. Just remember that deferring payments means that interest will continue to accrue while the student is in school and will be added to your principal balance. 

Learn more about how repayment options can affect your loan and how much you end up paying overall.

How to Reduce Interest and Save Money

Now that you know how interest works, here are some tips to help you minimize the amount you must pay:

  • Never miss a payment. The interest on missed payments will be added to your principal balance.
  • Enroll in automatic payments. It ensures you always pay on time. Plus, there’s another benefit of automatic payments: many private lenders offer a rate discount that will reduce your interest costs.
  • Make interest payments while the student is in school. You can choose to pay just the interest portion or pay interest and the principal, which can lower your interest costs even more.
  •  Put additional money on the principal of your loan. Have extra money from a tax return or a bonus from work? Put it on the principal. You’ll not only pay off your loan sooner but also reduce interest fees.
  • Maximize all federal aid first. Rates are generally lower, and certain protections are available with federal loans, including loan forgiveness.
  • Shop private lenders. If you need a private loan to help bridge the gap where federal aid leaves off, shop reputable lenders for the best rates. We happen to know a good one.
  •  Apply for scholarships and grants. That’s FREE MONEY that can lower the cost of college and the amount you borrow.

Brazos is Here to Make Borrowing for College Affordable

For more than 40 years, Brazos Higher Education has been helping make education more affordable for students and parents. As a Texas non-profit, we offer competitive rates that can save you money. Contact us to learn more.