For a federal undergraduate loan disbursed in the 2025–2026 school year, the interest rate is 6.39%; graduate loans carry 7.94% and Parent PLUS loans 8.94%.1FSA Partners. Interest Rates for Direct Loans First Disbursed Between July 1, 2025, and June 30, 2026 How much interest is paid on student loans over the life of the debt depends on the rate, the balance, and the repayment term: a $40,000 loan at 6% costs about $13,290 in interest on a 10-year plan and roughly $37,320 on a 25-year plan. Private student loan rates sit anywhere from about 3% to 18%, so the range of possible totals is even wider there.
What Sets Your Interest Rate
Federal rates are fixed for the life of the loan and reset each July 1 based on the 10-year Treasury auction held before June 1, plus a margin set by loan type.2Office of the Law Revision Counsel. 20 USC 1087e – Terms and Conditions of Loans Once your loan is disbursed, that rate never changes. For 2025–2026 loans, the numbers work out to 6.39% for Direct Subsidized and Unsubsidized undergraduate loans, 7.94% for graduate Unsubsidized loans, and 8.94% for PLUS loans.3Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans Made Under the William D. Ford Federal Direct Loan Program
Private lenders set their own rates based on your credit score, income, debt load, and whether you have a co-signer. Fixed-rate private loans lock in a single rate; variable-rate private loans move with a benchmark index and can rise or fall over time. The lowest advertised rates go to borrowers with strong credit and steady income.
How Interest Accrues Day by Day
Most student loans, federal and private, use daily simple interest. The lender takes your current principal balance, multiplies by the annual rate, and divides by 365. That gives you a daily interest charge. On a $20,000 balance at 5%, that comes to about $2.74 per day.
When you make a monthly payment, the money first covers whatever interest has accrued since your last payment. Anything left over reduces the principal. Early in repayment, interest eats most of each payment. As the balance falls, the daily interest charge falls with it, and more of each payment goes to principal. This is why extra payments made early in the loan save far more than the same dollars applied years later.
Interest That Builds Up While You’re in School
Whether interest is accruing during school depends on the loan type. Direct Subsidized Loans, available to undergraduates with demonstrated financial need, do not accrue interest while you are enrolled at least half-time, during your six-month grace period, or during deferment; the federal government covers it.4Federal Student Aid. Deferment
Direct Unsubsidized Loans are different. Interest starts accruing the day funds are disbursed and keeps accruing through school, grace, and any deferment. Borrow $20,000 in unsubsidized loans at 6.39% and stay in school four years without making payments, and roughly $5,100 in interest piles up before you enter repayment. Graduate students and PLUS borrowers only have access to unsubsidized and PLUS loans, so every dollar they borrow starts accruing interest immediately.
Capitalization: When Interest Turns Into Principal
Capitalization is the moment unpaid interest gets added to your principal balance. After it happens, you start paying interest on the interest. A $30,000 loan with $2,000 in unpaid interest becomes a $32,000 principal balance, and the daily interest charge jumps to match.
A Department of Education rule effective July 1, 2023 eliminated most of the old capitalization triggers on federally held loans. For Direct Loans, interest that builds during the grace period is no longer folded into principal; it is tracked separately and still owed, but your balance does not swell the way it once did.5Federal Student Aid. Borrower in Grace6Consumer Financial Protection Bureau. Tips for Paying Off Student Loans More Easily The main capitalization events that remain on Department-held loans are the end of a deferment on unsubsidized loans and leaving an Income-Based Repayment plan (by switching plans, missing the annual income recertification, or losing eligibility for a reduced payment).7Nelnet – Federal Student Aid. Interest Capitalization Older federal loans not held by the Department of Education can still capitalize interest after the grace period, and private loan capitalization rules vary by lender.
How Repayment Length Changes the Total
The length of your repayment term drives the total interest bill more than almost anything else. Take a $40,000 loan at 6%:
- On a 10-year Standard Repayment Plan, the monthly payment is about $444 and total interest paid is roughly $13,290.
- On a 25-year Extended Repayment Plan, the monthly payment drops to about $258 but total interest climbs to roughly $37,320 — nearly triple the shorter-term total.
The mechanics behind that gap are the same amortization pattern described earlier. On a 25-year plan, years pass before your payments start meaningfully reducing principal. A shorter term or extra payments aimed at principal can strip tens of thousands off the total cost.
Income-driven repayment plans complicate the picture. They cap your monthly payment at a percentage of discretionary income, and that payment may not cover the monthly interest charge. When that happens, the balance grows. Income-Based Repayment does not subsidize the shortfall, so borrowers whose payments fall below monthly interest should expect a rising balance until forgiveness eligibility, typically after 20 or 25 years of qualifying payments.8Federal Student Aid. IDR Court Actions
Origination Fees Push the Real Cost Higher
Federal loans also charge an origination fee that comes out of each disbursement. For loans disbursed between October 1, 2025 and September 30, 2026, the fee is 1.057% on Direct Subsidized and Unsubsidized Loans and 4.228% on Direct PLUS Loans.9FSA Partners. FY 26 Sequester-Required Changes to the Title IV Student Aid Programs Borrow $10,000 in unsubsidized loans and you receive about $9,894, but you owe interest on the full $10,000. A $20,000 PLUS loan nets you around $19,154 after the fee. Origination fees quietly raise your effective borrowing cost above the stated rate, and they are worth counting when you compare federal and private options.
Ways to Pay Less Interest
Turn on Autopay
Federal servicers cut your rate by 0.25 percentage points when you enroll in automatic payments, and many private lenders offer the same discount.10Federal Student Aid. Auto Pay Interest Rate Reduction On a $30,000 balance over 10 years, that shaves several hundred dollars off the total. The discount lasts as long as your payments process on time.
Pay Interest While You’re Still in School
If you have unsubsidized loans, small interest-only payments during school or the grace period keep unpaid interest from stacking up. Grace-period interest on Direct Loans no longer capitalizes, but it still has to be paid; clearing it before repayment starts means every dollar of your first monthly payment goes to principal.6Consumer Financial Protection Bureau. Tips for Paying Off Student Loans More Easily
Send Extra Payments Toward Principal
Any amount above your required monthly payment can be directed at the principal balance. Because interest is charged daily on that balance, every dollar of principal reduction lowers tomorrow’s interest charge and compounds forward. When you send an extra payment, confirm with the servicer that it is applied to principal rather than advanced toward next month’s bill.
Weigh Refinancing Against What You’d Give Up
Refinancing swaps existing loans for a new private loan at a different rate and term. A borrower with strong credit may land a lower rate and save thousands over the life of the loan. Refinancing federal loans into a private loan is permanent, though, and it ends your access to income-driven repayment, federal deferment and forbearance, and forgiveness programs. Refinancing one private loan into another does not carry that tradeoff, since those federal protections were never attached.
Claim the Student Loan Interest Deduction
You can deduct up to $2,500 of student loan interest paid each year from your federal taxable income, even without itemizing, on either federal or private loans used for qualified education expenses.11Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans For the 2026 tax year, the deduction starts phasing out at modified adjusted gross income above $85,000 for single filers and $175,000 for joint filers, and disappears entirely at $100,000 and $205,000. You cannot claim it if you file married filing separately or if someone else claims you as a dependent.12Internal Revenue Service. Publication 970 – Tax Benefits for Education At the full $2,500, a borrower in the 22% bracket saves about $550 in federal tax. Your servicer sends Form 1098-E showing the interest you paid that year.