What happens to the interest on my federal loans while I’m in school?

All federal student loans have a variable or fixed interest rate that is set by Congress. The interest rate will vary depending on the type of loan you borrow and when the loan disburses. In most cases, if you have borrowed a loan since 2007, your loan will have a fixed interest rate. This means the interest rate will remain the same for the life of the loan or until it is completely repaid.

The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor. The interest rate factor is determined by dividing your loan’s interest rate by the number of days in the year. (Federal Student Aid)

Simple daily interest formula:

Outstanding principal balance
X number of days since last payment
X interest rate factor
= interest amount

Interest will accrue while you are enrolled in school. However, if you have a Federal Direct Subsidized Loan, the government will pay the interest that accrues while you are in school as long as you are enrolled at least half-time.

If you borrow a Federal Direct Unsubsidized Loan or Federal Direct Grad PLUS Loan you will be responsible for paying the interest that accrues while you are enrolled in school. Students enrolled half-time or more do have the right to receive an in-school deferment from their loan servicer. Students are still responsible for repaying the interest that accrues, but the payments are not due during the deferment period. Interest that accrues during a student’s deferment will capitalize (be added to principal amount borrowed). Capitalization occurs at the time you enter repayment and results in a higher amount to be repaid.

Written by Josh Keen, Office of Student Financial Aid

Is there a limit to how much I can borrow in subsidized or unsubsidized loans?

Undergraduate and graduate students that borrow Federal Direct Student Loans (subsidized and/or unsubsidized) need to be aware there are maximum allowable loan limits. There is an annual maximum loan limit which restricts the total amount a student can borrow for an academic year (fall, spring, and summer). Also, there are aggregate maximum loan limits which restrict the amount a student can borrow over their college career.

Maximum Loan LimitsWritten by Josh Keen, Office of Student Financial Aid


What is the difference between federal and private loans?

In addition to Federal student loans, there are alternative educational student loans available from private lenders.  These programs are meant to supplement federal and state aid if you have exhausted all other sources of funding for your education.  Student and families are encouraged to use Federal loans since they usually offer borrowers lower interest rates and have more flexible repayment terms and options than alternative student loans.

An alternative student loan is a nonfederal loan, made by a private lender such as a bank, credit union, state agency, or a school.  The private lending entity provides valuable information about the alternative loan process and interest rate calculations.  This information should be carefully reviewed.

What should I know and expect about repaying my loans?

Understanding the details and commitment of student loan repayment is perhaps the most important aspect of the process.  It is important to understand when repayment will begin, where payments should be sent, what repayment plan is most appropriate, and what happens if a loan payment is not made or cannot be made.

For alternative student loans, the repayment process is determined by the private lender or servicer.  The private lender or servicer will need to provide this information to the borrower.

When does Federal student loan repayment begin?

You don’t have to begin repaying Federal student loans until after you leave college or drop below half-time enrollment.  Your loan servicer will provide you with a loan repayment schedule indicating when your first payment due date, amount of each payment, number of required payments, and frequency of payments.  The repayment process usually occurs after a grade period, allowing you time to secure a job and have earnings to assist in the repayment process.

For alternative student loans, the repayment process is determined by the private lender or servicer.  The private lender or servicer will need to provide this information to the borrower.

What Federal repayment plan is most appropriate?

A variety of repayment plans are available to borrowers and borrowers should look at each plan they may be eligible for and determine monthly and overall payment amounts.  The following list provides an overview if the types of repayment plans available for Federal student loans.

Standard Repayment – This is considered the default repayment plan and uses a level and fixed payment amount over 10 years.

Graduated Repayment – This plan allows lower early payments, followed by higher payments later in the repayment process.  Payments usually increase every two years.

Extended Repayment – This plan allows an extended repayment period for level and fixed payments, up to 25 years, instead of 10 years under standard repayment.

Income Based Options – Several repayment plans use a combination of your debt level, gross income, and/or family size to determine the payment amount.  Your payment amount under these plans will change as your income changes.