The amount of interest paid on student loans depends on four things: the interest rate, the loan balance, how long you take to repay, and whether unpaid interest capitalizes along the way. As a concrete benchmark, a $40,000 loan at 6% costs roughly $13,290 in interest over a 10-year standard repayment plan and roughly $37,320 over a 25-year extended plan. Federal undergraduate loans disbursed for the 2025–2026 academic year carry a fixed 6.39% rate; graduate loans are at 7.94%, and Parent PLUS loans at 8.94%.1FSA Partners. Interest Rates for Direct Loans First Disbursed Between July 1, 2025, and June 30, 2026 Private rates run roughly 3% to 18% depending on credit.
How Interest Builds Day by Day
Most student loans, federal and private alike, use daily simple interest. Each day the lender multiplies your current principal balance by the annual rate and divides by 365. On a $20,000 loan at 5%, that works out to about $2.74 a day ($20,000 × 0.05 ÷ 365). Over a 30-day month, roughly $82 in interest accrues.
When your monthly payment arrives, it covers that accrued interest first. Whatever is left reduces the principal. Because the daily charge is recalculated against the remaining principal, the interest portion of each payment shrinks over time while the principal portion grows. Early payments are mostly interest; late payments are mostly principal. That pattern is why extra payments early in the term save far more than the same dollars paid later.
Current Federal Student Loan Rates
Federal rates are reset each year under a formula in 20 U.S.C. § 1087e. The Department of Education takes the high yield from the 10-year Treasury note auction held before June 1 and adds a fixed margin that depends on loan type. The resulting rate applies to loans disbursed July 1 through the following June 30 and stays fixed for the life of each loan.2Office of the Law Revision Counsel. 20 USC 1087e – Terms and Conditions of Loans
For 2025–2026, the 10-year Treasury high yield was 4.342%, which produced these rates:3Federal Register. Annual Notice of Interest Rates for Fixed-Rate Federal Student Loans Made Under the William D. Ford Federal Direct Loan Program
- Direct Subsidized and Unsubsidized Loans for undergraduates: 6.39% (Treasury yield + 2.05%), capped at 8.25%.
- Direct Unsubsidized Loans for graduate and professional students: 7.94% (Treasury yield + 3.60%), capped at 9.50%.
- Direct PLUS Loans for parents and graduate students: 8.94% (Treasury yield + 4.60%), capped at 10.50%.
The statutory caps limit how high rates can climb in a year of unusually high Treasury yields. If the 10-year yield reached 7%, the undergraduate rate would stop at 8.25% rather than reaching 9.05%.2Office of the Law Revision Counsel. 20 USC 1087e – Terms and Conditions of Loans
Private Student Loan Rates
Private lenders price loans based on market conditions and your financial profile. Most use the Secured Overnight Financing Rate (SOFR) as their baseline index and add a margin that reflects your credit score, income, debt-to-income ratio, and whether you have a co-signer.4Consumer Financial Protection Bureau. LIBOR Is Going Away – Here Is What You Need to Know Fixed-rate options lock in one rate for the life of the loan. Variable-rate options start lower in many cases but can rise as SOFR moves. Rates currently span roughly 3% to 18%, with the lowest numbers reserved for borrowers with strong credit and steady income.
Subsidized vs. Unsubsidized: When Interest Starts
Whether interest accrues while you are in school makes a large difference in what you ultimately pay. Direct Subsidized Loans are available only to undergraduates who demonstrate financial need, and the federal government covers the interest while you are enrolled at least half-time, during the six-month grace period after leaving school, and during qualifying deferments.5Federal Student Aid. Deferment No interest builds on your balance during those periods.
Direct Unsubsidized Loans accrue interest from the day funds disburse, including while you are in school. Borrow $20,000 in unsubsidized loans at 6.39%, make no payments for four years of school, and about $5,100 in interest will have accumulated before your first bill. Graduate and professional students can only take out unsubsidized loans and PLUS loans, so they face accrual from day one on every dollar borrowed.
When Unpaid Interest Capitalizes
Capitalization is the moment accrued interest gets added to your principal balance. From that point forward, daily interest is calculated on the larger figure, so you pay interest on interest. If $2,000 in unpaid interest on a $30,000 loan capitalizes, your principal becomes $32,000 and daily charges jump immediately.
A Department of Education rule effective July 1, 2023, removed several of the old capitalization triggers. For Direct Loans held by the Department, the remaining capitalization events are narrower:6Nelnet – Federal Student Aid. Interest Capitalization
- At the end of a deferment on unsubsidized loans, the interest built up during the deferment capitalizes.
- On leaving an Income-Based Repayment plan, whether by switching plans, failing to recertify income by the annual deadline, or no longer qualifying for a reduced payment, accrued interest capitalizes.
Interest that accrues during the post-school grace period on Direct Loans is no longer capitalized.7Consumer Financial Protection Bureau. Tips for Paying Off Student Loans More Easily It still accrues and still has to be repaid, but it is tracked separately rather than folded into principal.8Federal Student Aid. Borrower in Grace Older federal loans not held by the Department of Education may still capitalize grace-period interest.
How Repayment Length Changes the Total
Term length is the biggest lever on total interest. A shorter term means higher monthly payments and a much smaller interest bill. A longer term flips both numbers.
Take a $40,000 loan at 6%:
- On a 10-year Standard Repayment Plan, the monthly payment is about $444, and total interest paid comes to roughly $13,290.
- On a 25-year Extended Repayment Plan, the monthly payment drops to about $258, but total interest climbs to roughly $37,320, nearly triple the shorter term.
The amortization math drives the gap. In the early years of any schedule, most of your payment goes toward interest because principal is at its highest. Over 25 years, many payments barely dent principal, so interest keeps compounding against a slow-shrinking balance.
Income-Driven Plans and a Growing Balance
Income-driven repayment (IDR) plans set your monthly payment as a percentage of discretionary income. That payment can be much lower than the standard figure, and in some cases lower than the monthly interest charge, which lets the balance grow. The SAVE plan had subsidized 100% of remaining interest after each payment, but as of late 2025 the Department of Education proposed a settlement agreement that would end SAVE and move enrolled borrowers into other available plans.9Federal Student Aid. IDR Court Actions Other IDR plans, including Income-Based Repayment, do not carry the same interest subsidy, so borrowers whose payments fall short of monthly interest should expect balances to grow until forgiveness is reached (typically after 20 or 25 years of qualifying payments).
Origination Fees Raise the True Cost
Federal loans also carry an origination fee deducted from each disbursement. For loans disbursed between October 1, 2025, and September 30, 2026, the fee is 1.057% for Direct Subsidized and Unsubsidized Loans and 4.228% for Direct PLUS Loans.10FSA Partners. FY 26 Sequester-Required Changes to the Title IV Student Aid Programs
Borrow $10,000 in Direct Unsubsidized Loans and about $9,894 lands in the school’s hands, but you owe interest on the full $10,000. A $20,000 PLUS loan nets about $19,154 after the 4.228% fee. The fee effectively lifts the true cost of borrowing above the stated interest rate, which matters when comparing federal and private options.
Ways to Pay Less Interest
Enroll in Autopay
Federal servicers reduce your rate by 0.25 percentage points when you enroll in automatic payments.11Federal Student Aid. Auto Pay Interest Rate Reduction Many private lenders match that discount. On a $30,000 loan, the reduction saves several hundred dollars across a 10-year term. It stays in effect as long as you remain enrolled and payments process successfully.
Pay Interest While in School
If you hold unsubsidized loans, making small interest-only payments while in school or during the grace period keeps interest from piling up. Grace-period interest on Direct Loans no longer capitalizes, but it still has to be paid.7Consumer Financial Protection Bureau. Tips for Paying Off Student Loans More Easily Clearing it before repayment begins means your first regular payment starts reducing principal.
Target Extra Payments at Principal
Any payment above the required amount can go toward principal. Because interest is calculated daily on the outstanding balance, every dollar off principal shrinks the next day’s interest charge. The earlier you make extra payments, the more compounding you save. Tell your servicer in writing that additional amounts should apply to principal rather than advance your due date.
Think Hard Before Refinancing Federal Loans
Refinancing swaps existing loans for a new loan at a different rate and term. Borrowers with strong credit and stable income may qualify for a lower rate through a private lender and save thousands in interest. Refinancing federal loans into a private loan, though, permanently gives up federal protections: income-driven repayment, deferment and forbearance options, and loan forgiveness programs. Refinancing private loans into another private loan carries no such tradeoff.
The Student Loan Interest Deduction
You can deduct up to $2,500 a year in student loan interest paid from your federal taxable income without itemizing.12Office of the Law Revision Counsel. 26 U.S. Code 221 – Interest on Education Loans It covers interest on both federal and private loans used for qualified education expenses, and you do not have to be currently enrolled to claim it.
The deduction phases out at higher incomes. For the 2026 tax year, it begins to shrink once modified adjusted gross income exceeds $85,000 for single filers or $175,000 for joint filers, and disappears entirely at $100,000 for single filers or $205,000 for joint filers. You cannot claim it if you file as married filing separately or if someone else claims you as a dependent.13Internal Revenue Service. Publication 970 – Tax Benefits for Education
At the full $2,500 deduction, the actual tax savings depend on your marginal bracket. A borrower in the 22% bracket saves about $550 for the year. Your servicer sends a Form 1098-E each year showing how much interest you paid.