You can make interest-only payments on student loans in several situations: voluntarily while you’re in school, in a grace period, or in deferment; as the required payment during a forbearance if your servicer agrees; or as the effective payment on an income-driven plan when your calculated amount happens to match your monthly interest accrual. For federal Direct Loans first disbursed between July 2025 and June 2026, undergraduates pay 6.39% and graduate borrowers pay 7.94%, so covering just the interest each month is not a trivial expense.1FSA Partners Knowledge Center. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 The payoff is that your balance stops growing, which keeps your future monthly payment lower and cuts what you’ll owe over the life of the loan.
When Interest-Only Payments Actually Matter
Whether this strategy is worth your time depends on one thing: is your loan subsidized or unsubsidized. On Direct Subsidized Loans, the federal government pays the interest during in-school enrollment, the grace period, and qualifying deferments. Your balance holds steady on its own, and there’s nothing to pay.2Federal Student Aid. Loan Deferment
Direct Unsubsidized Loans, PLUS Loans, and nearly all private loans get no such treatment. Interest accrues every day you’re in school, in the grace period, or in forbearance, and eventually that interest is added to your principal. On a $30,000 unsubsidized loan at 6%, about $1,800 in interest builds up over a single year of no payments.3Federal Student Aid. Get Temporary Relief: Deferment and Forbearance Paying that interest as it accrues is what keeps the balance from snowballing.
Federal Situations Where You Can Pay Only Interest
In School and During the Grace Period
While you’re enrolled at least half-time and for the six months after you leave school, federal loans require no payments. Voluntary payments are allowed, and on unsubsidized loans the smartest use of that option is knocking down interest before it can be added to principal.4Central Research Inc. (CRI). What You Need to Know While In Grace Even modest monthly payments during school can prevent thousands in additional costs over a standard 10-year repayment.
Deferment
Several deferments pause required payments entirely, including deferments for cancer treatment and active military service.5Federal Student Aid. Repayment Options Interest on subsidized loans is covered by the government during these windows. On unsubsidized loans, interest keeps building, and voluntary interest-only payments during a deferment keep the balance from moving.
General Forbearance
General forbearance lets you stop or reduce payments during financial hardship, medical expenses, job changes, or similar circumstances. A servicer can grant forbearance for up to 12 months at a time, with a cumulative cap of three years.6Federal Student Aid. Student Loan Forbearance Interest accrues on all loan types during forbearance, including subsidized loans, and the lender must tell you at least every 180 days that you can pay accrued interest before it’s added to your balance.7eCFR. 34 CFR 682.211 – Forbearance
This is where many borrowers lose money. If you can afford the monthly interest during forbearance, you sidestep the balance growth entirely. On a $30,000 balance at 6%, that runs about $150 a month, well under what a standard payment would be.
Income-Driven Repayment
Income-driven plans set your payment based on income and family size rather than balance. If your income is low enough, the calculated payment can be less than the monthly interest accrual, meaning your required payment is effectively an interest-only or below-interest amount. On Income-Based Repayment and Income-Contingent Repayment, some borrowers qualify for payments as low as $0.8Federal Student Aid. Compare Student Loan Repayment Plans With Our Student Loan Calculator
The SAVE plan, which previously waived 100% of remaining interest when borrowers made their calculated payment, is in flux. As of late 2025, SAVE borrowers were placed in administrative forbearance, with interest accruing since August 1, 2025, and the Department of Education has proposed a settlement that would end SAVE entirely.9Federal Student Aid. Changes to SAVE Administrative Forbearance If you’re on SAVE, use the federal Loan Simulator to compare other options.
Private Loans
Private lenders handle this differently, and terms vary. Many private loans include an interest-only repayment period while you’re enrolled, typically lasting up to four consecutive years. The specifics live in your promissory note, so that document is the starting point.
After you leave school, an interest-only arrangement on a private loan usually means requesting a hardship forbearance. Private lenders aren’t required to offer forbearance and have wide discretion over terms and duration. Some ask for a formal hardship application with a monthly budget. Others set a minimum, such as $25 a month or the full interest amount, whichever is higher. Because the three-year federal cap doesn’t apply, maximum duration is whatever your lender allows.
How to Set Up Interest-Only Payments
Voluntary Payments in School, Grace, or Deferment
No application is needed. Make a payment through your servicer’s website or by phone and specify that you want it applied to accrued interest. Some portals let you select an amount matching your monthly accrual; others make you do the math. The daily interest formula is your outstanding balance multiplied by your rate, divided by 365. On a $25,000 loan at 6.39%, that’s about $4.38 a day, or roughly $133 a month.1FSA Partners Knowledge Center. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026
Requesting General Forbearance
To enter a forbearance where your only obligation is interest, submit the federal General Forbearance Request form. The form asks for your name, Social Security number, the start and end dates you want, and your reason, with options including financial difficulties, employment changes, and medical expenses.10Department of Education. General Forbearance Request Your servicer decides whether to grant it and for how long.
You can submit through the servicer’s online portal, by fax, or by certified mail. A phone call may trigger a temporary administrative forbearance while paperwork is processed. Keep making regular payments until you receive written confirmation. Stopping early risks a late mark on your credit report.
Enrolling in an Income-Driven Plan
For a longer-term reduction that might bring your required payment down to the interest level or below, apply for an IDR plan. The application uses your adjusted gross income, which the system can pull directly from the IRS if you consent during the online application. If your income has changed since your last return, you can upload alternative documentation.11Federal Student Aid. Income-Driven Repayment (IDR) Plan Request IDR plans require annual income recertification, and missing that deadline can bounce your payment up to the standard 10-year amount.
What an Interest-Only Payment Actually Does
Federal regulations set the order in which payments are applied. On most Direct Loan plans, a payment first covers outstanding collection costs and fees, then accrued interest, then principal.12GovInfo. 34 CFR 685.211 – Miscellaneous Repayment Provisions Pay exactly the accrued interest with no fees outstanding, and the entire payment goes to interest. Your balance sits still. Pay a dollar more, and that dollar reduces principal, which slightly reduces tomorrow’s interest.
Capitalization
Capitalization is when unpaid interest is added to your principal. After that, you pay interest on interest. The Department of Education has eliminated capitalization for several events where it previously occurred, including exiting forbearance and leaving certain IDR plans. It’s still required by statute when you exit a deferment period, so interest that built up during deferment on unsubsidized loans is folded into principal at that point.2Federal Student Aid. Loan Deferment Paying interest as it accrues is the most effective way to keep this from raising your balance. Even partial payments reduce what eventually capitalizes.
Negative Amortization
If your monthly payment doesn’t cover all the accruing interest, the unpaid portion accumulates and you end up owing more than you borrowed. The Consumer Financial Protection Bureau warns that this significantly increases the total cost of a loan.13Consumer Financial Protection Bureau. What Is Negative Amortization? It’s the risk on IDR plans where the calculated payment falls below monthly interest.
The Trade-Off in Dollars
Interest-only payments save money compared to paying nothing, but they cost more than standard repayment. From the Department of Education’s own example: a borrower with $30,000 at 6% who enters forbearance for a year and pays nothing accrues $1,800 in interest. That raises total repayment costs by about $613 over the remaining life of the loan on a standard plan and lifts the monthly payment by roughly $18.3Federal Student Aid. Get Temporary Relief: Deferment and Forbearance
Pay $150 a month in interest during that forbearance year and the $1,800 is covered, the balance stays at $30,000, and none of those extra costs appear. What interest-only payments cost you is time: every month you pay only interest is a month your principal doesn’t shrink, pushing the payoff further out. The federal Loan Simulator lets you compare plans side by side for monthly payment, total paid, payoff date, and any forgiveness amount.8Federal Student Aid. Compare Student Loan Repayment Plans With Our Student Loan Calculator
Tax Deduction
Interest-only payments count toward the federal student loan interest deduction like any other interest payment. You can deduct up to $2,500 per year in student loan interest whether or not you itemize.14Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans Your lender reports the interest you paid on Form 1098-E, including payments made in school, in the grace period, in forbearance, or in active repayment.15Internal Revenue Service. 2025 Instructions for Forms 1098-E and 1098-T
The deduction phases out at higher incomes. For 2026, single filers with modified adjusted gross income under $85,000 get the full deduction, with a partial deduction up to $100,000. Joint filers get the full deduction below $175,000, phasing out at $205,000. Married couples filing separately can’t claim it at all.
Credit Reporting
The credit impact of interest-only payments comes from the official status of your loan, not the payment amount. During in-school and grace periods, federal loans are reported as current regardless of whether you pay.16Nelnet. Credit Reporting In active repayment, a loan is reported current as long as it’s less than 90 days past due, with delinquency reporting escalating in 30-day intervals after that.
During forbearance, your loans aren’t reported delinquent because there’s no required payment to miss. The report shows the loan in forbearance status, which is neutral, though it does signal to future lenders that you paused. Voluntary interest-only payments during forbearance don’t change the reported status, but they hold your balance steady, which matters for the debt-to-income ratio a future mortgage lender will look at. The bigger credit risk comes after forbearance ends: if the payment resets higher and you can’t cover it, missed payments show up fast.