Student Loan Interest Doesn't Take a Summer Break

By Garet Hanshew
Financial Aid Advisor, APUS

Summer is here. Your last semester is over. You made it through exams and projects and you might be thinking that you’ve earned a summer break. You might plan to take a vacation. But remember, your student loan interest may still be accruing.

Loan Interest Defined

The principal is the amount of money that you borrowed. Interest is the cost you pay to borrow money from a lender and is calculated as a percentage of the principal and can vary, depending on the type of loan you borrowed to help pay for school. If you borrowed a Federal Direct Unsubsidized or PLUS loan, interest begins to accrue as soon as they are disbursed.

If you’ve borrowed Federal Direct Subsidized loans, the U.S. Department of Education will pay the interest while your loans are in deferment or a grace period.

As the borrower, you are responsible for any interest accrued on your Federal Direct PLUS Loans from the Department of Education.

Interest is calculated this way: Interest = (Outstanding Principal Balance x Interest Rate Factor) x Number of Days since Last Payment. For example, if you borrow $10,000 with a 6.8% interest rate, you’ll be responsible for $10,056 after one month. After a year, you’re responsible for $10,680.

Capitalized Interest

When repayment begins, interest accrued on the loan capitalizes, meaning that unpaid interest is added to the loan principal. The Department of Education’s Federal Student Aid website provides an example of how capitalized interest affects a loan balance:

“On a $10,000 Direct Unsubsidized Loan with a 6.8% interest rate, the amount of interest that accrues per day is $1.86. If you are in a deferment for six months and you do not pay off the interest as it accrues, the loan will accrue interest totaling $340. At the end of the deferment, the accrued interest of $340 will be capitalized. You’ll then be charged interest on the increased outstanding principal balance of $10,340. This will cause the amount of interest that accrues per day to increase to $1.93.”

Contact Your Loan Servicer

Contact your loan servicing organization, which is selected by the Department of Education, to find out how much interest accrues on your loan each month. You can work with your servicer to devise a plan to pay down this interest and maybe even make payments toward your principal as well. Visit studentaid.ed.gov to learn who your servicer is and how to contact them.

While all of this effort might seem intimidating, you can take control of your loan interest by making payments during deferment and grace periods and relax a little easier in the summer sun.