Federal student loans do accrue interest while you’re in school, with one exception. Direct Subsidized Loans are the only federal student loan where the government covers the interest during enrollment, so the balance stays flat. Direct Unsubsidized Loans and Direct PLUS Loans both start charging interest the day the funds reach your school, even though you aren’t required to make payments yet. For loans first disbursed during the 2025–2026 academic year, undergraduate rates are 6.39%, graduate unsubsidized rates are 7.94%, and PLUS rates are 8.94%.
Subsidized Loans Are the Only Ones That Stay Flat
Direct Subsidized Loans are the exception. The government pays the interest for you while you’re enrolled at least half-time, during your six-month grace period after leaving school, and during any approved deferment.1Federal Student Aid. Top 4 Questions: Direct Subsidized Loans vs. Direct Unsubsidized Loans Borrow $5,000 as a freshman and you still owe $5,000 at graduation.
These loans are limited to undergraduates who show financial need on the FAFSA. Annual limits run from $3,500 for first-year students to $5,500 for third-year and beyond, with a $23,000 lifetime cap for dependent undergraduates.1Federal Student Aid. Top 4 Questions: Direct Subsidized Loans vs. Direct Unsubsidized Loans Graduate students have not been eligible since July 1, 2012.
The old “150% rule,” which stripped the subsidy from students who stayed enrolled longer than 1.5 times their program length, was repealed by the FAFSA Simplification Act as of July 1, 2021. There is no longer a time limit on receiving the interest subsidy based on enrollment duration.
Unsubsidized Loans Accrue Interest From Day One
Direct Unsubsidized Loans work the opposite way. You owe every dollar of interest that accrues from the moment the money is disbursed, and the government does not step in.1Federal Student Aid. Top 4 Questions: Direct Subsidized Loans vs. Direct Unsubsidized Loans Interest accrues daily on your principal at a fixed rate. No bill arrives while you’re in class, but the balance grows every day.
Unsubsidized loans are available to both undergraduate and graduate students regardless of financial need, which makes them the most widely used federal student loan. For loans first disbursed between July 1, 2025 and June 30, 2026, undergraduates pay 6.39% and graduate students pay 7.94%.2Federal Student Aid. Interest Rates and Fees for Federal Student Loans Each loan keeps its rate for life, so a student who borrows across four years may end up with four different rates.
The numbers add up faster than most borrowers expect. A graduate student who borrows $20,500 at 7.94% accrues roughly $1,628 in interest in a single year. Over two or three years of graduate school, the interest alone can exceed $4,000 before the first payment is due. That is often why the first repayment statement contains an unpleasant surprise.
PLUS Loans Carry the Highest Rate
Direct PLUS Loans, available to parents of dependent undergraduates and to graduate or professional students, carry the highest rate of any federal student loan. For the 2025–2026 academic year, that rate is 8.94%.3Federal Student Aid. Direct PLUS Loans for Parents Interest starts accruing when the funds reach the school, with no in-school subsidy of any kind.
PLUS loans also require a credit check. An “adverse credit history” — which the Department of Education defines to include accounts totaling $2,085 or more that are 90 or more days delinquent, and events such as bankruptcy discharge, foreclosure, or wage garnishment — can lead to a denial.4Federal Student Aid. PLUS Loans: What to Do if You’re Denied Based on Adverse Credit History Denied borrowers can still qualify with an endorser or through an appeal based on extenuating circumstances.
Origination fees are higher too. Through September 30, 2026, PLUS loans carry a 4.228% origination fee, compared with 1.057% for subsidized and unsubsidized loans.2Federal Student Aid. Interest Rates and Fees for Federal Student Loans The fee comes out of each disbursement, so a $10,000 PLUS loan puts about $9,577 in your account. Interest still accrues on the full $10,000.
When Accrued Interest Becomes Principal
Interest that accrues during school does not immediately become part of what you owe interest on. Capitalization is the event that folds unpaid interest into your principal balance, and once it happens, you start paying interest on that interest as well.5Nelnet. Interest Capitalization
Under current rules for loans held by the Department of Education, capitalization on federal loans happens in only a few specific situations:
- When a deferment period ends on an unsubsidized loan and the borrower enters or re-enters repayment.
- When a borrower leaves an income-driven repayment plan voluntarily, misses annual recertification, or no longer qualifies for a reduced payment after recertification.
Here is the piece many borrowers miss: interest that builds up during your grace period is not capitalized when you enter repayment.6Federal Student Aid. Student Loan Repayment The unpaid interest still exists and can raise your monthly payment or stretch out your timeline, but it does not get added to your principal. That distinction meaningfully limits how much your loan can grow before repayment begins.
Staying Enrolled Half-Time Keeps the Benefits
The subsidy on Direct Subsidized Loans, and the ability to defer payments on any federal loan, depends on staying enrolled at least half-time.7Federal Student Aid. Half-time Enrollment Each school sets its own half-time standard, though undergraduate semester programs typically use six credit hours per term as the benchmark. Many graduate programs treat as few as three credit hours per semester as half-time.
Drop below half-time and the school reports the change. Your subsidized interest benefit ends, and your six-month grace period starts counting down. Re-enroll at least half-time before that grace period ends and you regain in-school status, with a full new grace period waiting for whenever you eventually leave.8Federal Student Aid. General Requirements for Withdrawals and the Return of Title IV Funds Summer and holiday breaks between terms generally don’t disturb your status as long as you’re returning at least half-time.
Paying Interest During School
Nothing stops you from paying interest, or even principal, on a federal loan while you’re still enrolled. For unsubsidized and PLUS borrowers, this is one of the most cost-effective moves available.6Federal Student Aid. Student Loan Repayment Clearing interest as it accrues means there is nothing left to build up before repayment starts.
The daily interest math is simple: outstanding balance times your rate, divided by 365.25. On a $10,000 unsubsidized loan at 6.39%, that is roughly $1.75 a day, or about $53 a month. Over a 10-year repayment period, keeping up with that during school can save several hundred dollars.
One caveat worth flagging. Payments made during school or during your grace period do not count toward Public Service Loan Forgiveness or any other forgiveness program.6Federal Student Aid. Student Loan Repayment If forgiveness is your plan, holding that money until you’re in a qualifying repayment plan may serve you better.
Deducting Student Loan Interest on Your Taxes
Interest you pay on a federal student loan, whether during school or after, can be deductible up to $2,500 a year on your federal return.9Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction It’s an above-the-line deduction, so you can take it without itemizing. For 2026, the deduction phases out for single filers with modified adjusted gross income between $85,000 and $100,000, and for joint filers between $175,000 and $205,000.
To qualify, the loan must be in your name, your filing status can’t be married filing separately, and no one can claim you as a dependent. Your servicer sends Form 1098-E each year showing interest paid during the prior tax year. Even a few hundred dollars of interest paid while in school is worth reporting.