Do Student Loans Accrue Interest While in School?

Do student loans accrue interest while you’re in school? For most loans, yes. Direct Subsidized Loans are the single exception: the federal government pays the interest for you while you’re enrolled at least half-time. Every other federal loan (Unsubsidized and PLUS) and nearly every private student loan starts building interest the day the money is disbursed, even though you usually aren’t required to make payments yet.

The One Loan That Doesn’t Accrue Interest in School

Direct Subsidized Loans go to undergraduates with demonstrated financial need. While you’re enrolled at least half-time, during your six-month grace period after leaving school, and during approved deferments, the federal government covers the interest that would otherwise accumulate on the balance.¹ When you enter repayment, the balance should match what you borrowed, minus any principal payments made along the way.

One boundary worth knowing: the subsidy has a time limit. You can only receive Direct Subsidized Loans for up to 150% of your program’s published length, so six years for a standard four-year degree. Cross that line while still enrolled and you lose the subsidy on your existing subsidized loans, not just future ones. Interest then starts accruing on the whole subsidized balance the same way it would on an unsubsidized loan, and it capitalizes when your grace period or deferment ends.²

Loans That Do Accrue Interest From Day One

Direct Unsubsidized Loans

Unsubsidized Loans carry no interest subsidy. Interest starts on the disbursement date and keeps building whether you’re full-time, half-time, or on a break.³ You still don’t have to make payments while enrolled at least half-time, but the meter runs the entire time. Graduate borrowers pay a higher rate than undergraduates, so graduate-level unsubsidized debt grows faster.

Direct PLUS Loans

PLUS Loans go to parents of dependent undergraduates and to graduate or professional students. They carry the highest federal rate and begin accruing on the disbursement date.³

Parents should note that PLUS Loans have no automatic grace period. Repayment technically starts once the loan is fully disbursed, while the student is still in school. You can request an in-school deferment covering the student’s half-time enrollment plus six months after they graduate or drop below half-time, but you have to apply for it.⁴ Interest keeps accruing through the deferment, and unpaid interest capitalizes when it ends.⁵

Private Student Loans

Private lenders set their own rates and terms, and nearly all private loans begin accruing interest at disbursement. There’s no government subsidy, so every dollar of in-school interest is yours. Some lenders let you defer payments during enrollment, but interest still builds. Rates can be fixed or variable; a variable-rate loan may start lower but can climb if market rates rise. Read the promissory note before signing, because private loan terms are governed entirely by your contract with the lender.

How Much Interest Actually Builds Up

Federal rates are fixed for the life of each loan but reset each academic year for new disbursements. For loans first disbursed between July 1, 2025, and June 30, 2026:⁶

Direct Subsidized and Unsubsidized Loans for undergraduates: 6.39%
Direct Unsubsidized Loans for graduate and professional students: 7.94%
Direct PLUS Loans for parents and graduate students: 8.94%

Federal loans use daily simple interest. Your annual rate is divided by 365, then multiplied by your current principal.⁷ On a $10,000 unsubsidized undergraduate loan at 6.39%, daily interest is about $1.75, or roughly $639 a year. Over a four-year degree, that same loan would accumulate about $2,556 in unpaid interest before your first payment. Most private loans use the same daily calculation, though some compound monthly, so check the loan agreement.

Why In-School Interest Matters Later: Capitalization

Interest that builds while you’re in school doesn’t sit off to the side forever. At certain trigger points, your servicer adds all that unpaid interest to your principal balance. That’s capitalization, and once it happens, future interest is calculated on the larger balance.⁸

For federal loans, the main triggers are:

End of a deferment period, including in-school deferment on unsubsidized and PLUS loans³
End of the six-month grace period on unsubsidized loans, when you enter repayment
Leaving an income-driven repayment plan (unpaid interest may capitalize)
Consolidation, which rolls outstanding unpaid interest into the new consolidation loan balance

Concretely: borrow $20,000 in unsubsidized loans, let $5,000 in interest accumulate through four years of school and a grace period, and your repayment balance starts at $25,000. From that point on, daily interest is calculated on $25,000, not $20,000.

How to Keep Interest From Growing While You’re Still Enrolled

Pay the Interest as It Accrues

The most direct way to avoid capitalization is to cover the interest each month while you’re in school. On a $10,000 unsubsidized undergraduate loan at 6.39%, that’s about $53 a month. You aren’t paying down principal, but you’re keeping the balance from growing. Federal law bars prepayment penalties on federal and private education loans, so paying early costs you nothing extra.⁹ Partial payments help too. Even $25 a month reduces what capitalizes when repayment starts.

Deduct the Interest You Pay

Any interest you pay, including voluntary payments while still in school, may be deductible up to $2,500 per year.¹⁰ The deduction covers interest on both federal and private student loans and is taken as an adjustment to gross income, so you don’t have to itemize.

The deduction phases out at higher incomes. For the 2026 tax year, single filers see it shrink starting at $85,000 in modified adjusted gross income and disappear at $100,000. For joint filers, the range is $175,000 to $205,000.¹¹

1
Office of the Law Revision Counsel. 20 U.S. Code 1087e – Terms and Conditions of Loans
2
Federal Student Aid. Time Limitation on Direct Subsidized Loan Eligibility
3
eCFR. 34 CFR 685.202 – Charges for Which Direct Loan Program Borrowers Are Responsible
4
Federal Student Aid. Direct PLUS Loan Basics for Parents
5
Federal Student Aid. In-School Deferment
6
Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026
7
Federal Student Aid. Interest Rates and Fees for Federal Student Loans
8
Federal Student Aid. What Is Loan Capitalized Interest
9
Federal Register. Truth in Lending
10
Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans
11
Internal Revenue Service. Revenue Procedure 25-32 – 2026 Inflation Adjustments