When Do Student Loans Start Accruing Interest?

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If you have a student loan or are considering getting one, you may wonder when interest starts accruing on it. Is it once you graduate or leave college, or does it start right away?

Student loans start accruing interest the moment the loan is deposited into your bank account. The way that interest is charged to the borrower varies, though, depending on the type of loan you have. Here's what you need to know.

How Does Interest Work for Subsidized Loans?

Direct subsidized loans are student loans offered by the federal government to undergraduate students who demonstrate financial need. They start accruing interest the day you receive your loan.

The federal government pays the interest on subsidized loans while you're a student at least half-time, during the six-month grace period following graduation and during any loan deferments. Once your grace period ends, you'll begin making loan payments, including interest, on your direct subsidized loans.

When Do Unsubsidized Loans Accrue Interest?

Direct unsubsidized loans are also student loans offered by the federal government and are available to undergraduate and graduate students regardless of financial need.

Direct PLUS loans, often referred to as parent PLUS loans or grad PLUS loans, are another unsubsidized loan option. Parent PLUS loans are for the parents of undergraduate students, while graduate PLUS loans are for professional and graduate students.

The interest on both direct unsubsidized and direct PLUS loans begins the day you receive the funds. Unlike with direct subsidized loans, however, you are responsible for all interest charges on unsubsidized loans, from the moment you take out the loan until the day you pay it off.

You don't have to make monthly payments on direct unsubsidized loans while enrolled at least half-time or during the grace period. PLUS loan recipients also have the option to delay payments until the loan recipient graduates, is no longer a student at least half-time or leaves school.

That said, paying at least the interest on an unsubsidized loan before you are required to begin making monthly loan payments can save you a significant amount of money. That's because the accrued interest will be "capitalized," or added to your original principal amount, once the grace period ends. At that point your loan will begin accruing interest on the new loan amount—the principal plus the capitalized interest.

When Does Interest Start for Private Student Loans?

Private student loans are loans offered by banks, credit unions and other providers to help students with education expenses. As with federal student loans, private student loan interest typically begins accruing when you receive the loan funds.

The terms you receive on a private student loan will depend on the lender, and the interest rate can be fixed or variable. A fixed rate stays the same for the entire loan, while a variable interest rate can change over time.

Many private loans require you to begin making payments while you are in school, but others may allow you to defer payments while you are enrolled. Check your loan agreement or call the lender directly to learn more about how they charge interest and when payment is required.

Is There a Grace Period?

Many loan providers offer a grace period that postpones your loan payments until after you leave school and have the opportunity to start earning a decent salary. That grace period can be as short as a few months or as long as six months. So, for example, if you leave school in June and your lender gives you a six-month grace period, your first loan payment will be due in January of the following year.

Not all grace periods are the same, though. It depends on the loan type and servicer. Below are the grace periods for both federal and private loans:

  • Subsidized and unsubsidized direct federal loans: Six months
  • PLUS federal loans: No grace period. However, graduate and professional students are given an automatic six-month deferment on loan payments; parents with PLUS loans can request a six-month deferment. Contact your servicer to find out more.
  • Private loans: Varies by lender

Thinking of delaying your student loan payments until the grace period is over? Doing so can help you keep more money in your pocket for now, but could mean increasing the total cost of the loan depending on the type of loan you have. As mentioned, interest will continue to accrue on unsubsidized loans and make them even more costly over time due to capitalized interest.

However, it won't hurt to let the grace period run its course if your loans are subsidized. You don't pay interest on these loans until it's time to start repaying them, so the original loan amount will be the same amount you owe when the grace period is over.

How to Pay Off Student Loans

Now that you know when interest starts on your student loans, it's time to develop a repayment strategy. Here are some tips to help you save a bundle on interest when repaying your student loans.

1. Start repaying in college.

The earlier you can start paying back your student loans, the more your wallet will benefit. If you have unsubsidized loans, you can substantially reduce the amount you'll pay in interest over the life of the loan. Or you can put a dent in the principal if you have subsidized loans.

2. Pay as much as you can each month.

A few extra dollars each month can help you pay off your loans faster. Also, consider putting any unexpected lump sums of cash you receive toward your student loans. Be sure to let the loan servicer know that you want to apply the overpayment to the current month's payment to lower the principal.

3. Prioritize high-interest loans.

Jot down all your student loans and arrange them by interest rate. Focus on making extra payments on the loan with the highest interest rate since it costs you the most. Plus, prioritizing high-interest loans help you pay down your outstanding balances and reach the finish line faster.

4. Consolidate federal loans.

You can consolidate your federal student loans to streamline the repayment process. Beyond only having to make one payment each month, you will also receive one interest rate for all the loans you consolidate into a single loan product and possibly reduce the time you spend paying off the balances.

5. Refinance private loans.

If you have private loans, consider refinancing to secure a lower interest rate and save money. Experian CreditMatch™ can match you with potential lenders based on your credit profile.

The Bottom Line

Consider making payments while in school to reduce the cost of borrowing to fund your education. Even if you don't have a ton of money to spare, start small and increase your payments as your income grows to pay off your student loans faster.

It's also vital to stay on top of your student loans as they will appear on your credit report soon after you receive the funds. You can view student loan activity on your credit report and confirm there are no inaccuracies with free credit monitoring through Experian.