Yes, FAFSA loans have interest. Every federal student loan you receive after filing the FAFSA carries a fixed interest rate that is set the year the loan is disbursed and stays the same for the life of the loan. For loans first disbursed between July 1, 2025, and June 30, 2026, undergraduates pay 6.39%, graduate and professional students pay 7.94%, and Direct PLUS borrowers (parents and graduate students) pay 8.94%.1Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 Whether that interest starts piling up while you’re still in class or waits until you graduate depends on the type of loan.
How Your Rate Is Set and Why It Doesn’t Change
Federal student loans disbursed since July 1, 2006, carry a fixed rate. Congress set the formula in 20 U.S.C. § 1087e: each year’s rate is tied to the high yield from the final 10-year Treasury note auction held before June 1, plus a fixed add-on that depends on the loan type.2Office of the Law Revision Counsel. 20 U.S. Code 1087e – Terms and Conditions of Loans The May 2025 auction cleared at 4.342%, which produced the current rates after adding 2.05% for undergraduate loans, 3.60% for graduate unsubsidized loans, and 4.60% for PLUS loans.1Federal Student Aid. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026
Once a loan is disbursed, its rate is locked. If Treasury yields climb next year, your existing loans are unaffected. If you borrow again next year, that new loan may carry a different rate.3Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans Made Under the William D. Ford Federal Direct Loan Program A student who borrows in each of four years can end up with four separate rates on four separate loans.
Subsidized vs. Unsubsidized: When the Interest Clock Starts
The rate matters, but the type of loan matters just as much, because it decides when interest actually begins hitting your balance.
Direct Subsidized Loans
On a subsidized loan, the federal government pays the interest for you while you’re enrolled at least half-time, during the six-month grace period after you leave school, and during approved deferments.4Consumer Financial Protection Bureau. What Is a Subsidized Loan? Your balance at graduation is the same as the balance on your disbursement day. Only undergraduates who demonstrate financial need qualify.
Direct Unsubsidized Loans
Unsubsidized loans charge interest from the day the funds are disbursed. Nobody covers it for you. If you leave the interest unpaid during school, it accumulates and eventually gets rolled into your principal. On a $20,000 unsubsidized loan at 6.39%, roughly $5,100 in interest would build up over four years of school before your first required payment.
How the Daily Interest Charge Is Calculated
Federal student loans use simple daily interest. Your servicer takes your current principal balance, multiplies by the interest rate, and divides by the number of days in the year to get the day’s charge.5Federal Student Aid. Interest Rates and Fees for Federal Student Loans A $10,000 loan at 6.39% generates about $1.75 in interest per day, roughly $52.50 in a 30-day month.
Because the calculation runs on your current balance, any payment you make immediately shrinks the base that tomorrow’s interest is figured on. There are no prepayment penalties on federal student loans, so extra payments always reduce total interest paid.
Capitalization: When Unpaid Interest Becomes Principal
Capitalization is the event that turns accrued interest into new principal. When it happens, your servicer adds the accumulated interest to your balance, and from then on, daily interest is calculated on the larger amount. You start paying interest on your interest.
For loans held by the Department of Education, the main capitalization trigger is entering repayment after you leave school. Interest that built up during school and the grace period gets folded into principal at that point. Capitalization can also occur when an unsubsidized loan exits deferment, or when a borrower on an income-driven plan fails to recertify income on time.6Nelnet – Federal Student Aid. Interest Capitalization
The way to avoid capitalization is to pay interest as it accrues. Even paying just the monthly interest, without touching principal, keeps unpaid interest from being added to the balance.
Paying Interest While You’re Still in School
Nothing in the rules stops you from making payments while enrolled. On an unsubsidized or PLUS loan, covering even part of the monthly interest during school prevents it from capitalizing later. On a $5,000 unsubsidized loan, paying interest during school rather than letting it capitalize can save more than $500 over the life of the loan, and the savings grow with the balance. For a subsidized loan, this isn’t relevant during school or the grace period because the government is covering interest for you. It does become relevant during forbearance, which is not a subsidized period.
The Student Loan Interest Deduction
You can deduct up to $2,500 per year in student loan interest actually paid, even if you don’t itemize. The deduction applies to interest on any qualified education loan, including all federal Direct Loan types.7Internal Revenue Service. Publication 970, Tax Benefits for Education Your servicer sends Form 1098-E each January showing the interest you paid during the prior year.
For tax year 2026, the deduction phases out between $85,000 and $100,000 of modified adjusted gross income for single filers, and between $175,000 and $205,000 for joint filers. Interest that accrued but was not actually paid during the calendar year does not qualify.
PLUS Loans and the One-Time Origination Fee
Two things worth knowing if your FAFSA-related borrowing involves anything beyond standard subsidized or unsubsidized loans.
Direct PLUS Loans, for parents of dependent undergraduates and for graduate students, carry the highest federal student loan rate (8.94% for 2025–2026) and require a credit check.8Federal Student Aid. PLUS Loans Interest begins accruing the day funds are disbursed, and no portion is ever subsidized. Parents can defer payments while the student is enrolled at least half-time and for six months after, but interest keeps accruing throughout and capitalizes at the end of the deferment.9U.S. Department of Education, Federal Student Aid. Direct PLUS Loan Basics for Parents On a $30,000 Parent PLUS loan at 8.94%, deferring through a four-year degree plus the grace period adds more than $12,000 to the balance before repayment starts.
Separate from interest, every federal student loan also charges a one-time origination fee that is deducted proportionally from each disbursement before the money reaches your school. PLUS loans have historically carried a fee of around 4%; Direct Subsidized and Unsubsidized Loans carry a smaller one. The fee does not affect your interest rate, but you will receive slightly less than you borrowed while owing the full principal, so if you need an exact amount for tuition you need to borrow a little more to cover it.