Do You Pay Interest on Student Loans? Rates, Accrual, and Relief

Yes, you do pay interest on student loans. Almost every education loan, federal or private, charges interest that accrues every day you carry a balance, and the total you repay is usually thousands more than what you borrowed. There is one meaningful exception: on Direct Subsidized Loans, the federal government pays the interest for you while you are in school at least half-time and during your six-month grace period.¹ Every other type of student loan starts accruing interest the day the money is disbursed.

When Interest Starts, and Who Pays It

The type of loan determines whether interest is your problem from day one or someone else’s for a while.

Direct Subsidized Loans are available only to undergraduates with demonstrated financial need. The government covers the interest during in-school enrollment (at least half-time), the six-month grace period, and qualifying deferments. Your balance sits still during those windows.¹

Direct Unsubsidized Loans, Direct PLUS Loans, and private student loans work differently. Interest starts accruing the day the loan is disbursed to your school and never pauses, whether you are still in class, in your grace period, or in repayment.² No one covers that interest for you.

How Daily Interest Adds Up

Federal student loan interest is calculated every day. The formula: current principal balance times the interest rate, divided by 365.25. The result is what gets added to your account for that day.³

An example makes the size of this real. On a $30,000 balance at 6.39%, daily interest is roughly $5.25. That works out to about $158 per month before you make a single payment. Every day you carry the balance, another $5.25 gets added. Every payment that lowers your principal also lowers what tomorrow’s interest will be, which is why paying above the minimum, or paying interest while still in school, matters over the life of the loan.

What Rate You’ll Pay

Federal loan rates are fixed for the life of each loan. Once the loan is disbursed, the rate does not change, no matter what happens in the wider economy. Congress ties the rate to the high yield of the 10-year Treasury note auctioned before June 1 each year, plus a statutory add-on that varies by loan type, up to a statutory cap.⁴⁵

For loans first disbursed between July 1, 2025, and June 30, 2026:

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%

Every borrower who takes out the same type of federal loan in the same academic year gets the same rate. Credit history and income have no effect. Rates for the 2026–2027 academic year will be set from a May 2026 Treasury auction and announced separately.⁴

Private lenders work in the opposite way. They price each loan based on the borrower’s or cosigner’s credit, and they offer fixed and variable options. Variable rates move with market benchmarks like SOFR, so your monthly interest cost can rise or fall. A borrower with excellent credit might see a rate in the 4% to 5% range, while someone with limited credit history can face rates above 10%. Some private lenders also charge origination fees, which push the true cost above the stated rate.

How Unpaid Interest Can Grow Your Balance

Interest you don’t pay doesn’t just sit there forever. At certain moments defined by federal regulation, unpaid accrued interest gets added to your principal. That process is called capitalization, and once it happens, future daily interest is calculated on the new, larger balance.²

Common triggers include:

The end of your grace period. Interest that accrued on unsubsidized loans during the six months after you left school gets folded into principal.
The end of a deferment or forbearance where interest was accruing.
Leaving certain income-driven repayment plans with unpaid interest on the account.

The way to prevent capitalization is to pay accruing interest as it builds. Even partial payments during school or a payment pause keep the balance from ballooning later.

Interest During Deferment and Forbearance

Pausing your payments does not pause interest on every loan, and the two most common pauses are not equivalent.

Deferment

During a qualifying deferment, the government pays the interest on your Direct Subsidized Loans, so that balance stays level.⁶ Interest still accrues on Direct Unsubsidized Loans and PLUS Loans, and you owe it. If you don’t pay it during the deferment, it capitalizes at the end.²

Forbearance

Forbearance is a temporary pause, typically granted for up to 12 months at a time when you face financial difficulty.⁷ There is no government help with interest during forbearance. Interest accrues on every type of loan, subsidized included, the entire time. Whatever is unpaid at the end capitalizes.

How Your Payments Are Applied

When you make a monthly payment on a federal student loan, it goes to accrued interest first. Only what’s left over reduces your principal.⁸ The Department of Education does not charge late fees on federally owned Direct Loans, so there is no late-fee layer siphoning off your payment.³

This interest-first order has a consequence early in repayment, when your balance is highest: a large share of each payment covers interest rather than reducing what you owe. If your payment doesn’t even cover the month’s interest, principal will not shrink at all, and the unpaid piece can eventually capitalize.

Anything you pay above the minimum, once accrued interest and any fees are satisfied, goes to principal. By default, the extra is applied to the loan with the highest interest rate first, and your servicer may advance your due date as a result.⁹ An advanced due date can be misleading if it tempts you to skip a month while interest keeps accruing.

Ways to Pay Less Interest

A few strategies genuinely lower what you pay over the life of the loan.

Autopay Discount

Federal loan servicers cut your rate by 0.25% when you enroll in automatic debit.¹⁰ On a $30,000 loan at 6.39%, that small reduction saves roughly $400 to $500 over a standard 10-year term. Many private lenders offer a similar discount.

Paying Interest While Still in School

For unsubsidized loans, interest is accruing the whole time you’re enrolled. Making even small interest-only payments during school keeps that interest from capitalizing when repayment begins. You do not have to cover the full monthly interest; any amount reduces what would otherwise compound later.

Income-Driven Repayment Subsidies

Under the Income-Based Repayment plan, if your calculated payment does not cover all accruing interest, the government pays 100% of the unpaid interest on subsidized loans for the first three consecutive years of repayment.¹¹ The former SAVE plan, which had a broader interest waiver, was terminated through a settlement in December 2025; a new plan called the Repayment Assistance Plan is expected by July 1, 2026.¹²

Military Interest Rate Cap

Active-duty servicemembers can have the rate on pre-service student loans capped at 6% under the Servicemembers Civil Relief Act. The cap covers private loans, Direct Loans, and FFEL Program loans taken out before entering active duty, and it lasts for the duration of service as long as the service period exceeds 30 days.¹³ Interest above 6% during that period is forgiven, not deferred. Loans taken out after entering service do not qualify, and consolidating eligible loans during service can wipe out the benefit.

Student Loan Interest Tax Deduction

You can deduct up to $2,500 per year in student loan interest from your federal taxable income, even if you don’t itemize.¹⁴ It applies to interest on both federal and private qualified education loans, and it reduces your adjusted gross income directly.

The deduction phases out at higher incomes. For the 2025 tax year, the phase-out range is $85,000 to $100,000 for single filers and $170,000 to $200,000 for joint filers; above those, the deduction is gone.¹⁵ If you paid $600 or more in student loan interest during the year, your servicer will send Form 1098-E reporting the amount.¹⁶ You can still claim smaller amounts; you just may need to pull the figure from your servicer’s records yourself.

1
eCFR. 34 CFR Part 685 – William D. Ford Federal Direct Loan Program
2
eCFR. 34 CFR 685.202 – Charges for Which Direct Loan Program Borrowers Are Responsible
3
Edfinancial Services. Payments, Interest, and Fees
4
Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans Made Under the William D. Ford Federal Direct Loan Program
5
Office of the Law Revision Counsel. 20 USC 1087e – Terms and Conditions of Loans
6
eCFR. 34 CFR 685.204 – Deferment
7
Consumer Financial Protection Bureau. What Is Student Loan Forbearance
8
Edfinancial Services. Frequently Asked Questions – Section: Payments, Interest, and Fees
9
Edfinancial Services. How Payments Are Applied
10
Federal Student Aid. How Can I Lower My Student Loan Payments
11
Federal Student Aid. Income-Driven Repayment Plans
12
U.S. Department of Education. U.S. Department of Education Announces Agreement with Missouri to End SAVE Plan
13
Office of the Law Revision Counsel. 50 USC 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service
14
Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans
15
Internal Revenue Service. Publication 970 – Tax Benefits for Education
16
Internal Revenue Service. About Form 1098-E, Student Loan Interest Statement