Repaying student loans: what happens to interest in school during the grace period and in repayment
Quick Answer
Repaying student loans means interest differs by type: on a Direct Subsidized Loan a borrower owes none while enrolled at least half time or, generally, in grace periods, while on a Direct Unsubsidized Loan the borrower is responsible for interest in school and in grace periods. In repayment, interest accrues on all loans.
Unpaid interest may be capitalized, which adds it to your principal. Private student loans follow their own contracts, so check yours.
At a glance
- Subsidized in school
- No interest owed while enrolled at least half time
- Unsubsidized in school
- Borrower responsible for interest
- Capitalization
- Unpaid interest may be added to principal
- First step
- Contact your servicer before repayment
Interest accumulation while repaying student loans
For unsubsidized loans, interest begins to accrue as soon as the lender disburses the funds. Once you begin repaying a student loan, you owe interest on every loan you hold regardless of the loan type.
Subsidized loans do not accrue interest
A borrower is not obligated to pay interest on a Direct Subsidized Loan while enrolled at an eligible school at least half time, unless required to make payments during those periods. This rule applies to the period before your repayment starts. You can confirm your loan type by checking your monthly statement or your loan servicer’s portal.
A Direct Subsidized Loan determines if the government pays your interest
A Direct Subsidized Loan is a type of federal loan where the government pays the interest while you are in school. This means your balance stays the same until you enter repayment.
Borrowers are responsible for unsubsidized interest
Unsubsidized loans differ because the borrower is responsible for the interest that accrues on a Direct Unsubsidized Loan during in-school and grace periods. To accrue means to accumulate or build up over time as a result of a specific rate. A Direct Unsubsidized Loan is a federal loan where the borrower is responsible for all interest that builds up.
This means the interest balance grows while you study. A new student loan often carries these terms from the start.
The grace period determines when interest begins to accrue
A grace period is a set amount of time after you finish school before you must begin making payments. During this time, certain loans may not charge you any interest. Knowing this period helps you understand when your loan balance will start to grow.
You should verify your specific loan terms to see which rules apply to your balance.
Should you pay interest while in school?
For unsubsidized loans, you may choose to pay interest to prevent the balance from growing before you start your repayment plan. You can compare subsidized vs unsubsidized student loans to understand how a repayment plan is a structured schedule that determines how much you pay each month and for how long.
Which loans do not accrue interest while you are in school?
A borrower is not obligated to pay interest on a Direct Subsidized Loan while enrolled at an eligible school at least half time, or during grace periods, according to 34 CFR Part 685 (U.S. Department of Education).
Other loan options differ because a borrower is responsible for the interest that accrues on a Direct Unsubsidized Loan during in-school and grace periods, according to 34 CFR Part 685 (U.S. Department of Education). These rules determine the cost of the debt before student loan repayments begin.
Types of loans with no school interest
The Direct Subsidized Loan is the specific program where the government pays the interest while the student attends school. This assistance program helps borrowers avoid growing balances during their education. You can weigh how interest keeps growing on your loan servicer’s website to see which ones qualify for this benefit.
Timing of interest capitalization on your student loan
Unpaid interest on a student loan is added to the principal balance through a process called interest capitalization. This occurs when the lender moves accrued interest into the principal amount of the loan. Once interest capitalizes, the borrower pays interest on that new, higher balance during the repayment of student loans.
Interest accrual depends on loan type
The timing of this process depends on the specific loan type. A borrower is responsible for the interest that accrues on a Direct Unsubsidized Loan during in-school and grace periods. Conversely, a borrower is generally not obligated to pay interest on a Direct Subsidized Loan during grace periods.
Capitalization affects future interest charges
Capitalization changes the amount later interest is charged on. Borrowers should check their specific loan terms to see when capitalization occurs.
When does unpaid interest get added to your balance?
Unpaid interest gets added to your balance when interest capitalization occurs. This typically happens when a loan enters repayment or after a period of deferment or forbearance.
How do you start your repayment?
You start your repayment when your loan servicer contacts you to help you select a repayment plan and set up your payments. This process begins after your grace period ends. You should receive a notice from your servicer before your first payment is due.
Contact your loan servicer for help
Contact your loan servicer immediately if you do not receive a notice or if you have questions about your account. Some servicers offer a small interest-rate reduction for automatic payments, so ask what yours offers. The servicer manages the administrative side of your debt and helps you choose a plan that fits your budget.
Student loan refinance options
- Log into your student loan repayment website to view your current balance and interest rate.
- Use a plan calculator to determine which monthly payment fits your monthly budget.
- Select a repayment plan through your loan servicer to confirm your official start date.
- Verify your payment status on your account dashboard to confirm the system accepted your first payment.
Steps to begin your loan payments
Follow these steps to initiate your student loan repayment. First, identify your loan servicer through your loan portfolio. Next, review the repayment plan options the servicer presents to you. Finally, confirm your monthly payment amount and the date the funds will leave your bank account.
Discounts available for repaying your balance
Some student loan servicers offer a small interest-rate reduction for setting up automatic payments. You should ask your specific servicer what discount they offer for an autopay arrangement. Before you enroll, check how it reduces your tax bill and confirm any applicable rule or discount in writing from the servicer.
A defense student loan may have specific terms depending on the service provider. You should check the specific terms of your loan to see if your servicer applies a reduction to your interest rate for automatic withdrawals.
Is there an autopay discount?
Some student loan servicers offer a small interest-rate reduction for automatic payments. You should see how student loans affect credit scores and check with your specific servicer to see if they apply this discount to your account.
Borrowers at different loan stages
- Students with unsubsidized loans
- You are responsible for interest during school and grace periods if you borrow unsubsidized loans without interest benefits.
- Borrowers entering repayment
- Check your balances when school is ending because unpaid interest may be added to your principal as you enter repayment.
Interest assumptions that cost money
- Ignoring unsubsidized interest in school causes the balance to grow and cost more later.
- Missing the first bill can cause late payments to start right away.
Steps for repaying student loans and managing interest
Deciding how to manage interest during and after school requires having your loan documentation ready to review.
Repayment checklist
- List your loans and types. Write down every loan you hold and identify if it is a Direct Subsidized or Direct Unsubsidized Loan.
- Note which loans accrue interest in school. Identify Direct Unsubsidized Loans as interest accruing.
- Decide whether to pay interest early. Choose whether to pay interest on Direct Unsubsidized Loans now to prevent it from accruing during in-school and grace periods.
- Confirm your servicer and plan. Contact your loan servicer to verify your current repayment plan and confirm they have your correct contact information.
- Set up autopay if offered. Enroll in an automated payment system through your servicer to ensure consistent payments toward your balance.
Frequently asked questions
- Who is responsible for interest during the grace period?
- Borrowers are responsible for interest on a Direct Unsubsidized Loan during grace periods. Conversely, a borrower is generally not obligated to pay interest on a Direct Subsidized Loan during grace periods.
- How does interest capitalization work for my debt?
- Interest capitalization happens when a lender moves accrued interest into the principal balance. This process occurs when a loan enters repayment or after a period of deferment or forbearance.
- Where can I find my specific loan types?
- You can confirm your loan type by checking your monthly statement or your loan servicer’s portal. Identifying your specific loan types helps you manage interest capitalization during student loans loan repayment.