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When do student loans accrue interest?

Kat Tretina

February 19, 2019

If you’re like most college graduates, you took out a certain amount of student loans when you were in school. Once you entered repayment, you may have been shocked to find that you owed far more than you originally borrowed — potentially thousands more. That frustrating fact is due to student loan interest which accrues over time, causing your loan balance to grow.

Student loans can help you achieve the degree you need to succeed, but it’s important to understand how they work and how interest affects your student loans. Read on to learn how interest works and when it starts accruing on your loans.

How student loan interest works

Lenders don’t give out loans out of the goodness of their hearts. They’re in the business of making money. To make issuing loans worthwhile, they charge interest. Interest charges are added to your account each month, which is why you end up owing more than you borrowed in the first place.

For example, let’s say you took out $35,000 in student loans and had a 5.05% interest rate and repaid them over the course of ten years. Your monthly payment would be $372; a portion of that payment would go toward interest charges, while the rest would go toward the principal. Over the course of your repayment, you’d pay a total of $44,650. Thanks to interest, you’d pay over $9,500 more than you originally borrowed.

What determines your interest rates

Depending on what type of student loans you have, you may have a fixed or variable rate. Fixed rate loans stay the same for the length of your loan, while variable rates generally start out low, but fluctuate over time. Federal student loans have fixed interest rates, while private student loans can be fixed or variable.

Federal student loan interest rates are set by Congress. For loans disbursed between July 1, 2018 and July 1, 2019, the interest rates for federal loans are as follows:

  • Direct Subsidized and Unsubsidized Loans: 5.05%
  • Graduate Direct Unsubsidized Loans: 6.6%
  • Direct PLUS Loans: 7.6%

Private student loan lenders set their own rates based on your credit score, income, and the size of the loan you need. Rates can be as low as 4%, or as high as 15%.

How interest is calculated

Student loan interest is compounded daily, meaning the interest that accrues is added to your balance every day. To see how this works, pretend you took out $10,000 at 5% interest.

First, calculate your daily interest rate by dividing 5% by 365 to get 1.37. On a $10,000 loan, that works out to $1.37, which is added your loan balance. When interest is calculated again, it looks at your new balance of $10,001.37, and so on. That’s how compound interest can cause your loan to grow in size quickly.

As you start to repay your loans, your lender will require you to pay off any interest that accrues and any late fees before they’ll apply your payment to the principal.

As you pay down your loan, less interest will accrue, so more of your payment will go toward principal each month rather than interest fees. If you can, paying even a little extra each month can help cut down on how much you pay in interest charges, allowing you to save more money.

When student loans start accruing interest

Your student loans start accruing interest the day you take them out. However, how those interest charges work is dependent on the type of loans you have.

Federal Subsidized Loans

If you qualify for federal Subsidized Loans, you get a break on interest charges. Interest still accrues on the loan from day one, but the federal government covers the cost of interest charges while you’re in school and for six months after you graduate — your grace period. Once that grace period is over, you’re responsible for repaying the loan plus interest on your own.

Because the government covers the accrued interest for several years, taking out Subsidized Loans over other forms of debt can help you save thousands of dollars, reducing how much you owe once you graduate.

Federal Unsubsidized Loans

While federal Unsubsidized Loans have lower interest rates than some other loans, they lack the benefits of Subsidized Loans. With this form of student loan, you’re responsible for repaying the interest charges that accrue while you’re in school and during your grace period. The only benefit is that you don’t have to start making payments until the grace period is over.

PLUS Loans

Like Unsubsidized Loans, interest begins to accrue on PLUS Loans right away and you’re responsible for all interest charges that build up. However, you don’t have to start making payments until your grace period after graduation ends.

Private student loans

Private student loans work quite differently from federal loans. Interest begins to accrue right away, and, depending on your lender, you may be required to start making payments immediately. In some cases, you may have to make payments while you’re still in school.

Some private lenders offer payment plans where you can pay just the interest that accrues each month, but not all lenders offer this option. Make sure you understand the loan’s repayment terms before accepting a loan.

Managing your loans

Student loan interest can add greatly to your loan balance, causing it to balloon over time. By understanding how interest is calculated and when it begins to accrue on the loans you have, you can better manage your loans and accelerate your repayment.

If you need help tackling your debt, sign up for Pillar to get personalized recommendations and advice about your student loans.

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