Yes, FAFSA loans have interest. Every federal student loan offered through the FAFSA carries a fixed interest rate that stays the same for the life of the loan, and for the 2025–2026 academic year that rate is 6.39% for undergraduates, 7.94% for graduate students, and 8.94% for PLUS loan borrowers.1Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 What varies is when that interest starts costing you money, and that difference can add thousands of dollars to what you eventually pay back.
Current Federal Student Loan Rates
Rates for loans first disbursed between July 1, 2025, and June 30, 2026 are fixed at:1Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026
- 6.39% on Direct Subsidized and Unsubsidized Loans for undergraduates
- 7.94% on Direct Unsubsidized Loans for graduate and professional students
- 8.94% on Direct PLUS Loans for parents and graduate students
These rates are set once a year based on the May Treasury auction and locked in for every loan disbursed during that academic year. If you borrow again the following year, that new loan may carry a different rate, but the loans you already have keep the rate they were issued with. A student who borrows across four years of school can end up with four separate rates across their loans.2Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans Made Under the William D. Ford Federal Direct Loan Program
Congress capped how high these rates can climb in future years: 8.25% for undergraduate loans, 9.50% for graduate unsubsidized loans, and 10.50% for PLUS loans.3Office of the Law Revision Counsel. 20 U.S. Code 1087e – Terms and Conditions of Loans Current rates are well below those ceilings.
When Interest Starts: Subsidized vs. Unsubsidized
The single biggest factor in how much interest you’ll actually owe is whether your loan is subsidized or unsubsidized.
Direct Subsidized Loans
On a subsidized loan, the federal government pays the interest for you during three periods: while you’re enrolled at least half-time, during the six-month grace period after you leave school, and during approved deferment.4Consumer Financial Protection Bureau. What Is a Subsidized Loan? Your balance sits at the disbursed amount until repayment begins. Only undergraduates who demonstrate financial need qualify, and the borrowing limits are lower. A dependent first-year student can take up to $3,500 in subsidized loans, out of $5,500 total across subsidized and unsubsidized combined.5Federal Student Aid. Annual and Aggregate Loan Limits, 2025-2026 Federal Student Aid Handbook
Direct Unsubsidized Loans
Unsubsidized loans charge interest from the day the money is disbursed. Class time, grace period, deferment: none of it stops the clock, and no one else is paying for you. If you don’t cover that interest while in school, it builds up and gets added to your balance when you enter repayment. On a $20,000 unsubsidized loan at 6.39% over four years of school, roughly $5,100 in interest would accumulate before your first required payment.
How Daily Interest Adds Up
Federal student loans use a simple daily interest formula. Your servicer takes your outstanding principal, multiplies it by your interest rate, and divides by the number of days in the year.6Federal Student Aid. Interest Rates and Fees for Federal Student Loans That’s your daily interest charge.
A $10,000 loan at 6.39% generates about $1.75 in interest each day, or roughly $52.50 over a 30-day month. Because the calculation runs daily, any payment you make immediately shrinks the balance that tomorrow’s interest is calculated on. Even modest payments during school move the number.
PLUS Loans Cost the Most
Direct PLUS Loans go to parents borrowing for dependent undergraduates and to graduate or professional students. They carry the highest federal rate (8.94% for 2025–2026) and require a credit check, which regular student loans don’t.7Federal Student Aid. PLUS Loans Interest begins accruing on the disbursement date and is never subsidized.8U.S. Department of Education, Federal Student Aid. Direct PLUS Loan Basics for Parents
Parent PLUS borrowers can defer payments while the student is enrolled at least half-time and for six months after, but interest keeps accruing throughout. At the end of deferment, that unpaid interest capitalizes.8U.S. Department of Education, Federal Student Aid. Direct PLUS Loan Basics for Parents On a $30,000 Parent PLUS loan at 8.94%, deferring through a four-year degree and the grace period would add over $12,000 to the balance before repayment starts. Many parents don’t fully grasp that when they sign the Master Promissory Note.
Capitalization: When Interest Becomes Principal
Capitalization is the moment unpaid interest gets rolled into your loan balance and starts generating interest of its own. After it happens, your daily interest is calculated on the higher amount.
For loans held by the Department of Education, the most common trigger is entering repayment after leaving school. Any interest built up during school and the grace period is added to the principal at that point. Capitalization can also happen when an unsubsidized loan exits deferment, or if you fail to recertify your income on time under an income-driven repayment plan.9Nelnet – Federal Student Aid. Interest Capitalization
The way to avoid capitalization is to pay interest as it accrues. Even covering just the monthly interest, without touching principal, keeps that interest from being folded into the balance later.
Paying Interest While You’re Still In School
Nothing in federal loan rules stops you from making interest payments while you’re enrolled, and there are no prepayment penalties on any federal student loan. If you’re carrying an unsubsidized loan or a PLUS loan and can cover even part of the monthly interest during school, you prevent that interest from capitalizing when repayment begins. On a $5,000 unsubsidized loan, paying interest during school rather than letting it capitalize can save more than $500 over the life of the loan, and the savings grow with larger balances.
For subsidized loans, this doesn’t apply during school or grace periods because the government is already covering the interest. It does become relevant during forbearance, which is not a subsidized period.
The Student Loan Interest Tax Deduction
You can deduct up to $2,500 per year in student loan interest paid on your federal tax return, even if you don’t itemize.10Internal Revenue Service. Publication 970, Tax Benefits for Education The deduction applies to interest paid on any qualified education loan, including every federal Direct Loan type. Your servicer sends Form 1098-E each January showing how much interest you paid during the prior year.
For tax year 2026, the deduction phases out starting at $85,000 of modified adjusted gross income for single filers and $175,000 for joint filers, disappearing entirely at $100,000 single and $205,000 joint. Only interest you actually paid during the calendar year counts. Accrued interest that hasn’t been paid doesn’t qualify.