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Understanding Student Loan Interest and Repayment Strategies

Federal student loans will start accruing interest again on September 1, 2023, with payments due starting in October. However, if you’re still in school or in a period of deferment, interest may not apply to your balance right away. Below, we discuss when different types of student loans start accruing interest, how grace periods work, and tips for paying off your student loan debt.

When Do Subsidized Loans Accrue Interest?

Direct subsidized loans are offered by the federal government to undergraduate students who demonstrate financial need. These loans start accruing interest again on September 1. However, the government pays the interest on subsidized loans when:

• You’re attending school at least half-time
• You’re within the six-month payment grace period after leaving school
• Your loans are in deferment

In these scenarios, you won’t be responsible for interest even after September 1 because it will be covered by the government. After leaving school, you’re responsible for paying interest on subsidized loans when your loans are out of deferment and after the six-month grace period.

When Do Unsubsidized Loans Accrue Interest?

Direct unsubsidized loans are available to undergraduate and graduate students regardless of financial need. Parent PLUS loans and grad PLUS loans also fall into this category. Borrowers are responsible for paying interest on unsubsidized loans from the day of disbursement. So, after the loan payment pause ends on September 1, interest will start immediately accruing on unsubsidized loans even if you’re in school.

Students in school, as well as those whose loans are in deferment or forbearance, are not required to make payments on unsubsidized loans, even while interest accrues. However, paying at least the interest during these periods can save you a significant amount of money. Unpaid loan interest will be “capitalized,” or added to your original principal amount, when your grace period ends, causing your balance to increase over time.

When Do Private Student Loans Accrue Interest?

Banks, credit unions, and other providers may offer private student loans to help with education expenses. Typically, private student loans begin accruing interest as soon as you receive the funds. Since private loans didn’t qualify for the special COVID-19 relief pause on interest and payments, interest charges will continue as normal.

The terms you receive on a private student loan will depend on the lender, and the interest rate can be fixed or variable. Check your loan agreement or call the lender directly to learn more about how they charge interest and when payment is required.

Do Student Loans Have a Grace Period?

Many loans—both federal and private—offer a grace period that postpones your loan payments until after you leave school and have the opportunity to start earning an income. A typical grace period is six months. If, for example, you leave school in June and your lender gives you a six-month grace period, your first loan payment would be due the following January.

Not all grace periods are the same; it depends on the loan type and servicer. Below are the grace periods for both federal and private loans:

• Subsidized and unsubsidized direct federal loans (including grad PLUS): Six months
• Parent PLUS federal loans: Parents with PLUS loans can request a six-month payment delay. Contact your servicer to find out more.
• Private loans: Varies by lender

Keep in mind that grace periods are a way to avoid making payments, but using them could lead to an increase in your loan costs if your loans aren’t subsidized. Interest will continue to accrue on unsubsidized loans and private student loans while you’re not paying, which can make them more costly over time, especially if the interest capitalizes.

On the other hand, it won’t hurt to let the grace period run its course if your loans are subsidized. You’re only responsible for interest that accrues on these loans once it’s time to start repaying them, so the original loan amount will be the same amount you owe when the grace period is over.

How to Pay Off Student Loans

Now that you know when interest starts on your student loans, it’s time to develop a repayment strategy. Here are some tips to help you save interest when repaying your student loans:

1. Create a Budget

First, write down your monthly income and expenses to determine where your money is going and see what cash you can devote to paying off student loans. Reducing expenses in other areas could help you free up funds to tackle your balances.

2. Start Repaying in College

The earlier you can start paying back your student loans, the more your wallet will benefit. If you have unsubsidized loans, you could substantially reduce the amount you’ll pay over the life of the loan by paying early. Moreover, paying subsidized loans early can put a dent in the principal, decreasing the amount of time you’ll spend making payments after graduation.

3. Consider Income-Driven Repayment Plans

Federal loans may qualify for income-driven repayment plans that set your payment as a percentage of your disposable income and family size. If you’re in between jobs or can’t afford loan payments for another reason, getting on an income-driven repayment plan can make payments manageable. However, note that lowering payments puts less money toward your balance each month, and that can extend your loan repayment timeline.

4. Explore Loan Forgiveness Programs

If you have federal loans, certain loan forgiveness programs exist, including Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. Exploring forgiveness programs can help you eliminate your federal student loan balances faster.

For example, the PSLF program forgives your loan balance after you work for 10 years for an eligible employer in the public sector and make 120 qualified loan payments during that time period. The Teacher Loan Forgiveness program forgives up to $17,500 in student loans for borrowers who work for five years in a low-income school or educational facility.

5. Consolidate Federal Loans

You can consolidate your federal student loans to streamline the repayment process. Debt consolidation combines many payments into one, and you receive one interest rate on all loans. Some details to consider before consolidating are that rate discounts you receive might no longer apply when you combine loans, and consolidating could stretch out your repayment term.

6. Refinance Private Loans

If you have good credit and can get a lower interest rate on your federal or private loans, refinancing your student loans could save you money. Just keep in mind that you can only refinance loans with private lenders, which means you could lose federal loan benefits if you’re seeking to refinance those loans. If your credit isn’t in the shape it needs to be for refinancing, work on improving it for several months and apply for refinancing once your score’s a little higher.

The Bottom Line

When interest on student loans resumes, consider at least making interest-only payments while in school if you have private or unsubsidized loans because it can keep your balance from growing. Even if you don’t have a lot of money to spare, starting small and increasing your payments as your income grows can help you keep interest at bay.

Staying on top of each of your student loans is also vital since they appear on your credit report. You can view student loan activity on your credit report and confirm there are no inaccuracies with free credit monitoring through Experian.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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