Is There Interest on Student Loans? Rates, Accrual, and Deductions

Yes, there is interest on student loans, and for nearly every loan it starts building the day the money is sent to your school. For loans first disbursed between July 1, 2025, and June 30, 2026, federal undergraduate loans carry a fixed rate of 6.39%, graduate Direct Unsubsidized Loans are set at 7.94%, and Direct PLUS Loans for parents and graduate students sit at 8.94%.¹ Private loans work differently: the rate depends on your credit, and it can be fixed or variable.

Current Federal Student Loan Rates

Federal rates are locked in for the life of each loan. Whatever rate applies on the day of first disbursement stays with that loan until it is paid off, regardless of what happens in the broader rate environment.

Direct Subsidized and Unsubsidized Loans, undergraduate: 6.39%
Direct Unsubsidized Loans, graduate and professional: 7.94%
Direct PLUS Loans, parents and graduate students: 8.94%¹

Congress sets these rates through a formula tied to the 10-year Treasury note, and each rate is capped by statute: 8.25% on undergraduate loans, 9.50% on graduate Direct Unsubsidized Loans, and 10.50% on PLUS loans.² Those ceilings apply no matter how high Treasury yields climb.

When Interest Starts Accruing

For unsubsidized federal loans and virtually all private loans, interest starts the moment funds are disbursed to your school, even though you are not required to make payments while you are enrolled. On a $20,000 unsubsidized loan at 6.39%, roughly $3.50 in interest builds every day you are in class.

Subsidized federal loans are the exception. The government pays the interest for you while you are enrolled at least half-time, through the six-month grace period after you leave school, and during any approved deferment.² The balance does not grow during those stretches, which is what makes a subsidized loan meaningfully cheaper than an unsubsidized loan of the same size.

How Daily Interest Is Calculated

Federal student loans use simple daily interest. Multiply your current principal by your annual rate, then divide by 365.25 to account for leap years. That gives you the interest charged each day.³

A $20,000 balance at 6% works out to about $3.28 per day, or roughly $98 over a 30-day month. Early in repayment, most of your payment covers that interest rather than principal. As the balance shrinks, the daily charge drops and more of each payment starts eating into what you actually owe.

Capitalization Can Enlarge Your Balance

Capitalization is when unpaid interest gets rolled into principal. Once that happens, future interest is calculated on the larger combined amount, and you end up paying interest on interest.

On federal loans, capitalization is triggered at specific moments: when the grace period ends, when a deferment or forbearance ends, and when you leave certain repayment plans. Say $2,000 in interest accumulated on an unsubsidized loan across four years of school and a six-month grace period. When repayment begins, that $2,000 is added to principal, and every daily interest charge from that point forward is calculated on the higher balance.

Paying even a small amount toward interest while you are still in school prevents this and keeps your principal from creeping up before you have made your first required payment.

Private Student Loan Interest

Private lenders, including banks, credit unions, and online lenders, set their own rates based on your financial profile. Credit score, income, existing debt, and whether you have a cosigner all shape the offer. A borrower with strong credit may qualify for a rate below the federal figure; a borrower with a thin credit file could pay considerably more.

Private loans come in fixed and variable versions. Variable rates are typically tied to a benchmark such as the Secured Overnight Financing Rate or the Prime Rate, plus a margin the lender adds. When the benchmark moves, your rate and payment move with it. Unlike federal loans, private loans have no statutory rate cap, so there is no legal ceiling on how high a variable rate can climb.

Consolidation Does Not Lower Your Rate

Combining federal loans into a Direct Consolidation Loan produces a new rate that is the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of one percent.² Because of the rounding, consolidation never lowers your effective interest rate. It either matches your prior blended rate or nudges slightly above it.⁴ The value of consolidation is a single monthly payment and access to certain repayment plans, not interest savings.

Interest Cap for Active-Duty Servicemembers

The Servicemembers Civil Relief Act caps interest at 6% on any student loan you took out before entering active-duty service. Excess interest above 6% is forgiven outright rather than deferred, and your monthly payment is reduced accordingly.⁵

To claim the protection, send your servicer a written request with a copy of your military orders. You have until 180 days after your service ends to make the request, and the cap applies retroactively to the day you entered active duty. Loans taken out after you begin active duty do not qualify.

Student Loan Interest Tax Deduction

You can deduct up to $2,500 in student loan interest per year, even if you do not itemize. It is an above-the-line deduction, so it reduces your adjusted gross income directly.⁶

The loan must have been taken out solely to pay qualified higher education costs, including tuition, fees, room and board, and books, for you, your spouse, or a dependent. Federal and private loans both qualify, but loans from relatives or from an employer plan do not.⁷

For the 2026 tax year, the deduction phases out between $85,000 and $100,000 of modified adjusted gross income for single filers, and between $175,000 and $205,000 for married couples filing jointly. Married filing separately cannot claim it at all.

If you paid $600 or more in interest to a single lender during the year, that servicer must send you IRS Form 1098-E showing the exact amount.⁸ If you paid less than that, the deduction is still available; you just may need to pull the figure from your servicer’s records yourself.

Ways to Pay Less Interest

A few practical moves genuinely reduce what you pay over the life of a loan.

Set up autopay. Federal servicers cut your rate by 0.25% when you enroll in automatic monthly payments, and most private lenders offer the same. On a $30,000 balance repaid over 10 years, that adds up to roughly $700 saved.⁹
Pay interest while you are in school. Even small payments on unsubsidized loans prevent capitalization and stop your principal from growing before repayment starts.
Send extra toward principal. Federal student loans have no prepayment penalty, so any amount above your minimum reduces the balance immediately and cuts the daily interest going forward.
Pick a shorter repayment term when you can afford it. A 10-year standard plan costs more per month than extended or income-driven options, but you carry the balance for less time, and total interest drops accordingly.

These strategies stack. A borrower who uses autopay, chips in during school, and stays on the standard schedule can finish the same loan for thousands less than a borrower who does nothing beyond the required minimum.

1
Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026
2
Office of the Law Revision Counsel. 20 U.S. Code 1087e – Terms and Conditions of Loans
3
Edfinancial Services. Payments, Interest, and Fees
4
Federal Student Aid. 5 Things to Know Before Consolidating Federal Student Loans
5
Office of the Law Revision Counsel. 50 U.S. Code 3937 – Maximum Rate of Interest on Debts Incurred Before Military Service
6
Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans
7
Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction
8
Internal Revenue Service. Instructions for Forms 1098-E and 1098-T
9
Federal Student Aid. How Can I Lower My Student Loan Payments