How Student Loan Interest Works

Understand the true cost of borrowing

Man wearing headphones uses laptop in front of glass university windows and pillars


Kentaroo Tryman/Getty

To finance your college education, you may be considering student loans, or perhaps you’re already looking over your award letter. When weighing different loan options, consider the interest rate you’ll pay on your student loan. Regardless of the loan type, part of the total cost will be the interest accrued over your repayment period. 

Due to the economic fallout of COVID-19, the government suspended interest on federal student loans through Sept. 30, 2021.

But there are different loan interest structures depending on your loan provider, whether you’re an undergrad or grad student, and your credit history. And no matter how you pay interest, some of it may be tax-deductible. Here’s what to know about different kinds of student loan interest. 

Fixed Interest Rate Student Loans 

A fixed interest rate basically means that your interest rate won’t change while you’re in school, or while repaying your loan. For the period of July 1, 2019, through July 1, 2020, interest rates for federal Direct Subsidized, Direct Unsubsidized, and Direct PLUS student loans are between 4.53% to 7.08%.

Your rate depends on whether you’re an undergraduate or graduate student, and whether or not the loan is subsidized. Additionally, fixed rates differ for Direct PLUS loans and standard Direct student loans. 

However, a private lender’s fixed rate may include factors such as your credit history, course of study, and your college or university, which federal loans don’t rely upon.

Fixed Interest Rate Pros
  • Easier budgeting, as the total repayment amount can be calculated from the start

  • Loan refinancing might be available, if you need to change your rate

  • Offered by private and federal student loan lenders

  • Federal fixed-rate loans offer a .25% interest reduction during repayment, when you sign up for autopay

Fixed Interest Rate Cons
  • Your interest rates won’t decrease—a possibility with variable interest rates

  • The only option available with federal student loans

  • Private student loan lender interest rates may depend on your credit history, so ensure it’s in good shape

Variable Interest Rate Student Loans

Variable interest rates are primarily offered by private lenders and can fluctuate over the life of your loan, in step with an index rate—much like an adjustable-rate mortgage. As a result, your payments vary if the interest rate goes up or down.  

Federal student loans don’t have variable interest rates, unless your loan originated before July 1, 2006.

Variable Interest Rate Pros
  • Offered by private student loan lenders

  • Potentially offers low interest rates, depending on the index rate

  • Rates may be lower than those for federal loans

Variable Interest Rate Cons
  • Interest rates can rise

  • Not offered by the federal lending apparatus

  • Interest rate changes make it challenging to plan for long-term payments

Subsidized Student Loans

Subsidized loans are offered to undergraduate students demonstrating financial need, and allow you to put off payments until you’ve finished school. Financial need is defined as the difference between a school’s cost of attendance and your expected family contribution (EFC), according to the U.S. Department of Education.

"Expected family contribution" will be phased out and replaced by "Student Aid Index" beginning with the 2023-2024 award year, as part of the FAFSA Simplification Act.

The U.S. Department of Education subsidizes (or pays) your interest while you’re attending school at least half-time and during the grace period, which is the first six months after you leave school, whether graduating, quitting school, or enrolling below half time.

Subsidized Loan Interest Pros
  • Available to those demonstrating need

  • Government pays accruing interest while you’re in school and for the first six months

  • You don’t need to pay interest if you go into deferment, or during certain periods within select repayment plans

Subsidized Loan Interest Cons
  • Not available to students who don’t demonstrate a financial need

  • Not available to graduate students

  • Undergraduates are capped at $23,000 as a lifetime total

Unsubsidized Student Loans

Federal unsubsidized loans are offered to all students, independent of financial need, often to supplement subsidized loans. Your university considers your financial aid needs and the cost of attendance when awarding unsubsidized loans.

You’re responsible for paying interest on unsubsidized loans at all times. You could defer interest while in school, during the grace period, or during deferment, but it will still accrue and be added to your principal when you start making payments. 

Unsubsidized Loan Interest Pros
  • Available to all students, not just those showing financial need

  • You can defer interest while in school and during grace periods

  • Available to graduate students

  • Interest rate lower than the PLUS loan interest rate

Unsubsidized Interest Cons
  • Unpaid interest begins accruing during school and grace periods 

  • Interest added to your final bill upon graduation or the end of any grace period

  • $138,500 cap in total subsidized and unsubsidized loans for grad and professional students

  • Graduate unsubsidized loans have a higher interest rate than undergraduate loans

Student Loans With Grace Periods 

Most federal loans offer a six-month grace period, except Direct PLUS loans, which are primarily for parents and graduate students and have no grace period. Most private student loans don’t offer grace periods but check with your lender to see if it’s offered. 

Your grace period may be extended if you’re called to active duty military or return to school before your grace period ends. Your grace period may end early if you consolidate your loans.

The Bottom Line: Reducing Student Loan Interest Costs

The total student loan repayment amount depends on the type of loan, total loan amount, loan interest rate, duration of the repayment period, and your chosen repayment plan. That said, there are still a few options that may help you save money on student loan interest:

  1. Accept subsidized loans before turning to unsubsidized loans.
  2. Shop around for a private student loan interest rate that works for your budget. 
  3. The sooner you can repay the loan, the less interest will accrue. If you are financially able, try paying all of your interest–or toward your interest–while you’re in school. 
  4. Ask your student loan servicer whether you can receive an interest-rate reduction if you enroll in autopay, make all payments on time, and if any other discounts are available. 
  5. After you graduate, paying off your student loans on a faster timetable decreases the total amount you end up paying (although your payments will be higher). 

Refinance your student loan to get a better interest rate or consolidate your student loans to bring down the average rate.