When Do Student Loans Start Accruing Interest?

Written By
Julija A.
July 08,2023

Did you know that 45 million people in the US have student loan debt? This means that one in seven Americans has some outstanding debt relating to their studies. 

According to some statistics, the cumulative debt of all federal and private student loans in the US is around ​​$1.57 trillion. That’s a lot of debt, and the largest part of it comes from the interest that keeps piling up on those loans. 

So, when does interest start on student loans? In today’s article, we will try to answer that question and explain how grace periods work for different loan types. 

How Does Student Loan Interest Work?

Simply put, a student loan is money you borrow to pay for your studies. As with any other type of loan, you are expected to repay that money in the future. So, how does it work?

As soon as your financial institution disburses the funds to you or the school, the interest starts accruing. The interest rate is calculated as a percentage of your current principal and can be either fixed or variable. 

As the name suggests, the fixed rate stays the same throughout the whole lifetime of the loan, while the variable one may go up or down depending on various market conditions.

Whether you have a federal or a private student loan, you will be charged an interest rate for borrowing the money. So, how do student loan repayment terms work for different loan types? Let’s find out.

Federal Student Loans

Federal student loans are those backed up by the federal government. They can be split into two main categories: direct subsidized loans and direct unsubsidized loans. Here’s how they work:

Direct Subsidized Loans

Direct subsidized loans are issued to undergraduate students whose families cannot afford to cover their educational costs. One of the main benefits of these loans is that the unpaid interest does not accrue as long as the student is enrolled in school at least half of the time. After the student has just finished graduation, there is a student loan grace period of six months. 

Direct Unsubsidized Loans

Direct unsubsidized loans are available for all undergraduate and graduate students, regardless of their financial status. 

With these loans, students are responsible for the interest from the moment the loan is disbursed and until it’s paid in full. With these loans, the unpaid interest gets added to the principal loan amount, so it’s best to pay them off as quickly as possible.

Federal Student Loan Rates

Now that we know how subsidized and unsubsidized loans work let’s see the interest rates for 2024

If your loan was disbursed on or after July 1, 2022, and before July 1, 2023, this is the interest rate you can expect:

  • The interest on student loans for undergraduate students with direct subsidized and direct unsubsidized loans is 4.99%.

  • The interest rate for graduate and professional students with direct unsubsidized loans is 6.54%.

If your loan was disbursed before July 1, 2023, you should check the interest rate, as it will likely differ.

Private Student Loans

Private student loans are those issued by banks, online lenders, and credit unions. These are usually used by students that need a third-party loan servicer as they have already borrowed the maximum they could from the federal loans or couldn’t qualify for a federal loan in the first place. 

Unlike federal loans, private loans require a credit check, and in most cases, students need a co-signer to qualify for a loan. We should also mention that the interest rates on student loans issued by private lenders are usually much higher than those on loans issued by government bodies. 

Since there are many private student loan options available, it is crucial that you check the fixed and variable APR and the repayment and grace periods offered by the lender. Also, you should check if the lender charges any application or late payment fees so that you can keep track of any additional costs.

How Do Grace Periods Work on Student Loans?

You can think of a grace period as a pause in a student's life in which they don’t have to worry about their student loan payments. Most student loans have a six-month grace period right after graduation. The idea is to allow students to take a break while transitioning from school to regular adult life and get back on track with their finances. 

During the past two years, there were also some cases of student loan payment suspension as a part of the COVID-19 relief program.

Final Thoughts

Although they are a necessity, student loans can easily become a massive burden for a student and their family. That is why it’s essential to carefully consider all available options and have a good understanding of how interest accrues on student loans.

If it all seems overwhelming, you can always look for alternative ways to pay for college. After all, it’s all about your preferences and your financial situation.


When does a student loan start accruing interest?


Most student loans begin accruing interest as soon as the lender disburses them to a school. However, there are some exceptions to this rule. 

If, for example, you have a federal direct subsidized loan, your interest rate won’t accrue as long as you’re attending at least half of your school classes and activities.

Do you have to start paying private student loans right away?


Unlike federal student loans, each private loan has its own repayment terms. Some private lenders require that you start making loan interest payments while still in school. Others have specific grace periods similar to what federal loans offer. 

The average interest rate on a private student loan in the US in 2022 goes from 3.22% to 14.96% fixed or from 2.52% to 12.99% with a variable rate.

Do you have to pay student loans after 25 years?


Not necessarily. There’s something called a student loan forgiveness program. This program is available to those with a federal student loan who have been making their payments for 25 years under an income-driven repayment plan. If you qualify, you may be freed from paying off your remaining loan balance.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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