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

What information should I consider before borrowing a student loan?

Student loans are a common and convenient source of funding used by more than half of the students at the University of Illinois to help pay for their education. Many students do need to borrow and consider this a wise investment in their future. Before borrowing a student loan, consider this important information:

  • Borrow only what you need and can reasonably repay.
  • Develop a realistic budget and consider ways to lower your costs.
  • Research the average pay of your chosen field to know if your projected earnings will be enough to repay your student loans.
  • Keep track of your loan debt (principal and any accrued interest) so you will know the amount you will have to repay.
  • Know that repaying your student loan on time can help establish and maintain an excellent credit history.
  • Be aware that student loans are in your name and affect your credit history, so you should know and understand the obligations.
  • Unlike other forms of consumer debt, student loans cannot be discharged through bankruptcy except under extraordinary circumstances.
  • If you fail to make a payment on your student loan for an extended period, your loans may be placed into default.
  • A default on a federal student loan will require payment of additional costs, including collection costs, attorney’s fees, court costs, and additional interest. These costs may substantially increase the amount owed on your student loan.
  • No statutes of limitation apply to the collection of federal student loan debt. This means that your student loan debt may be collected many years, or decades, into the future.
  • The IRS may seize your tax refunds to repay a defaulted federal student loan.
  • Your future wages may be garnished to repay a defaulted federal student loan.
  • Your Social Security benefits may be garnished to repay a defaulted federal student loan.
  • Any disability benefits you receive may be garnished to repay a defaulted federal student loan.
  • A default on a federal student loan may result in the denial or revocation of a professional license, such as a license to practice medicine or law.

Written by Josh Keen, Office of Student Financial Aid

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.

What should I know about student loans if I want to be considered a responsible borrower?

You should only borrow what you need.

A loan, unlike a grant, is borrowed money that must be repaid.

You must keep your loan servicer informed of any changes in your name, address, telephone number, Social Security number, or school enrollment status.

You must repay your loan even if you didn’t get the education or job you expected, and they can’t be canceled because you didn’t complete your education.

You can prepay the whole loan or any part of it at any time without penalty.  This means you are paying some of the loan before it’s due.

If you apply for deferment, forbearance, or consolidation, you must continue to make payments on your loan until you have been notified that your request has been processed and approved.

Your student loan account balance and status will be reported to national credit bureaus on a regular basis.  Repaying your loan responsibly can help you establish a good credit rating and failing to repay your loan can damage your credit rating.

The consequences of defaulting (failing to pay according to your loan contract) on a federal student loan are severe and long lasting. For example, you might not be able to buy a car and your federal income tax refund could be applied to your student loan balance instead of being sent to you.

There are repayment options available to assist you if you’re having trouble making payments.