Student Loans: How Interest Accrues

One of the most important things to understand about their student loans is how interest accrues over the life of the loan. There are two different types of federal student loans, unsubsidized and subsidized loans.

Subsidized Loans

How interest accrues with subsidized loans is much different than how it accrues with unsubsidized loans. Subsidized student loans are needs-based and available to students who meet certain low income requirements. Because these loans are used to incentivize education, the loans are structured to be as attractive as possible.

The interest on these loans does not begin to accrue until six months after the student leaves school, either by graduating or by discontinuing studies. If the student returns to school, the interest stops accruing again until the student is not in school.

Unsubsidized Loans

Unsubsidized loans are not based on need and a certain amount per semester is available to most students. The interest on these loans begins to accrue the minute the loan is disbursed, and while the interest rate is typically very low, the interest does add up over time.

Students have the option of paying interest payments while they are in school or allowing the accrued interest to be added to the balance of the loan. If at all possible, interest payments should be made while in school to keep the loan manageable after graduation. Even if you cannot pay the accrued interest during the school year, if you work during the summer and can pay part of your earnings toward your student loans, you will be doing yourself a favor in the long run.

Private Loans

Because private loans can vary from lender to lender, there is no specific way in which interest accrual happens. For the most part, private loans begin to accrue interest upon dispersal, often at a higher rate than government subsidized and unsubsidized student loans. If you are managing multiple loans to fund your education, paying the accrued interest on the loans with the highest interest rate should be the first priority.

PLUS Loans

PLUS loans are loans parents can take to assist with their child's education expenses. The interest is typically at 5% and begins to accrue nine months after the student stops attending school, whether he or she has graduated or not. The minimum monthly payment for repayment of PLUS loans is $40 per month, and loan repayment can be extended over ten years.

While most students cannot afford tuition, books, room and board without the help of student loans, it is important to manage your student loans wisely. Opt for work study programs whenever possible, and take only the amount of loan you need to cover your costs.

Most students fail to realize how much debt they are building because they never have to make payments on the loans while in school. By understanding how interest accrues, you can have a better idea of how to mitigate the burden you will have after graduation to repay the loans.


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