How does interest accrue while I am in school?
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For subsidized federal student loans, your interest is paid by the U.S. government while you’re in school. For most other loans, interest continues to accrue, so you will owe more than you borrowed by the time you leave school.
Interest accrued while you’re in school can be “capitalized,” meaning it is added to your unpaid loan principal balance. When capitalization occurs, you are charged interest on interest.
For example, if you borrow $5,000 at a 10% annual rate for a twelve-month program, then you will accrue $500 while you’re in school and $250 during the six-month grace period, for a total of $750 in accrued interest by the end of the grace period. Capitalization adds that $750 to the principal balance, for a total of $5,750, so that you will accrue $575 in interest during the first year of repayment.
Capitalization occurs at specific times. For example, the interest on federal loans capitalizes when the grace period ends (and repayment begins), when a period of deferment or forbearance ends, when loans are consolidated, and at other times if you are on certain income-driven repayment plans. Private loans typically capitalize when the grace period, deferment, or forbearance ends. Consult your lender for details about interest on your student loans.