What is accrued interest? A guide for student loan borrowers.

By Sasha Bulatskaya | Published on October 21, 2025

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If you’ve ever filled out a student loan application, you’ve likely come across the concept of accrued interest and wondered what it means. Is it the same as an interest rate? Why not just call it “interest”?
A recent survey found 92% of college grads say they would have done college differently if they knew how much debt they’d graduate with. Many take out a loan only to be surprised by how much their loan balance has grown over time, even with regular payments. Accrued interest plays a big role in borrowing money and knowing what it is could save you a lot of financial stress.

What does accrued interest mean?

Accrued interest is the interest that accumulates on your loan over time. It’s like a little extra charge that gets added to the total amount you owe. This interest keeps piling up based on your loan’s interest rate, even if you’re not making payments. So, the longer you go without paying off your loan, the more accrued interest will be added to the principal amount you borrowed.

Accrued interest vs. interest rate

Think of it this way: The interest rate is what you’re getting charged for the loan every month. Accrued interest is the amount of interest that gets added to your account.

What does accrued interest mean for my student loans?

When it comes to student loans, understanding accrued interest is crucial. Many borrowers don’t realize that even if they’re in a grace period or deferment, interest may still collect (accrue) on their loans. This means that by the time you start making payments, your loan balance could be higher than what you originally borrowed. This knowledge gap is why many college students don’t realize they need to budget for a larger loan balance and monthly payment once they graduate.

Here’s an example:

Imagine taking out a student loan for $10,000 with a 6% Fixed interest rate and a 6-month grace period. You decide to pay nothing while you’re in school and during your college years, the interest accrues. By the time you graduate, you owe $12,700 instead of $10,000 because of accrued interest.

When you start repaying your loan, you’re not just paying off the $10,000 principal; you’re also tackling that additional $2,700 in accrued interest. This is because that accrued interest gets added to your account in a process called capitalization. Once your interest capitalizes, you’ll be paying that 6% on the new $12,700 principal balance, and your monthly payment will be $107 after your deferral period expires.*

*Rate and payment example listed above is for illustrative purposes only and may not be representative of rates or terms offered by Earnest.

How interest accrual works for federal student loans

It depends on the federal student loan type. For subsidized loans, the federal government covers your interest payments until the end of your six-month grace period. These loans start to accrue interest once the grace period is up.

For unsubsidized and PLUS loans, you’re responsible for covering the interest while in deferment and in school. This means your loan will accrue interest right away. Although you may not have to make payments while you complete your studies, your loan balance will be larger once your repayment period starts because of accrued interest.

How interest accrual works for private student loans

Every private lender has a different policy, but most private loans will begin to add interest to your account while you’re in school and into your grace period. When you graduate, the original loan amount will be larger because of the interest that’s accrued on your private student loan while you’ve been in deferment.

How to stop interest from accruing

The most effective way to stop interest from accruing is to make interest-only payments while you’re in school and during deferment periods. By doing so, you can keep your student loan balance in check and won’t have to worry about your loan ballooning out of control.
Putting a little bit toward your loans while you’re in school can make a big difference, even if it’s not a full interest-only payment. That’s why we offer a $25-in-school student loan payment option. It’s not a lot of money but it could make a big difference over the life of your loan. You can use the Earnest repayment calculator to see how much you pay with a $25 payment vs. in deferment (paying nothing while in school).

Don’t let accrued interest take you by surprise

Accrued interest is a part of the student loan journey that often goes unnoticed but can have a significant impact on your repayment process. By understanding how it works and taking proactive steps to manage it, you can stay on top of your loan and avoid surprises down the road.

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About the Author

Sasha Bulatskaya

Sasha is the Senior Manager of Brand and Content at Earnest. She has been writing for ten years and has been focused on educational finance and financial aid for over three. Her passion for mission-driven companies brought her to Earnest in 2020, and she's been helping make student finance more accessible ever since. She strives to demystify personal finance and student loans to help borrowers make the best decisions for their financial situation.

Disclaimer

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.