Interest and Capitalization

When you pay off your student loan in full, you’ll have paid more than the amount you originally borrowed. This is generally due to the accrual of interest and interest capitalization.

Interest rates on student loans

Whether you have federal or a private student loans, an interest rate is the rate charged to borrow money. It’s calculated as a percentage of your Current Principal. There are two primary types of interest rates: fixed and variable.

A fixed interest rate is an interest rate that stays the same for the life of the loan.

A variable interest rate is an interest rate that may go up or down due to an increase or decrease to the loan’s index. Variable rate Sallie Mae loans applied for on or after April 1, 2021, use the Secured Overnight Financing Rate (SOFR) as the index. Variable rate Sallie Mae loans applied for before April 1, 2021, use the London Interbank Offered Rate (LIBOR) as the index. These loans will be converted to SOFR in the second quarter of 2022.

Both LIBOR and SOFR are common rates used for loans and reflect the ups and downs of the market at large. 

Federal student loans only offer a fixed interest rate. Our private student loans generally offer a choice of fixed or variable rates.footnote 1

How interest accrues on student loans

The interest on your student loan begins to accrue (grow) on the first day we disburse (send) your loan’s funds to you or your school. It continues to accrue until you’ve paid off your loan. The interest rate for your loan is listed in your disclosure documents and billing statement. This is the same for both Federal Direct Loans and private student loans.

Student loan interest may be tax deductible

Your student loan interest—both federal and private—may be eligible for a tax deduction. Learn more about regulations and necessary forms.

Lamar discusses the impact of interest on your student loan

Understand capitalized interest on a student loan

Capitalized interest is a second reason your loan may end up costing more than the amount you originally borrowed.

Interest starts to accrue (grow) from the day your loan is disbursed (sent to you or your school). At certain points in time—when your separation or grace period ends, or at the end of forbearance or deferment—your Unpaid Interest may capitalize. That means it is added to your loan’s Current Principal. From that point, your interest will now be calculated on this new amount. That’s capitalized interest.

How graduate students can reduce capitalization on student loans

When you’re going back to school for a graduate degree, you may have started to pay back principal and interest on your undergraduate student loans.

If you choose to request a student loan deferment, you won’t have to make principal and interest payments during your deferment period. Your interest will continue to accrue (grow) while your loans are deferred, and at the end of the deferment, any Unpaid Interest will capitalize (be added to your loan’s Current Principal). This can increase your Total Loan Cost. If you can pay your accrued interest before it capitalizes, that can help keep your Total Loan Cost down.

How to reduce capitalization on student loans

You can lower your Total Loan Cost if you pay your interest before the capitalization period. Two of these periods are the end of your separation or grace period and the end of your graduate school deferment. If you’ve chosen the interest repayment option for your student loans, your interest shouldn’t capitalize, since you’ve paid it as it has accrued throughout school.

Alternatively, if you’re making fixed payments or deferring payments until after school, try to make small additional payments. Or try to pay all or some of your accrued interest before your separation or grace period ends and interest capitalizes. These actions can help you avoid—or at least lower—the amount of capitalized interest after you’re out of school, and every little bit helps.

Figure out your accrued interest

This calculator can help you figure out how your interest will accrue—and the difference it can make if you pay your interest down.
Calculate accrued interest

Related topics

footnote 1. Explore federal loans and compare to make sure you understand the terms and features. Private student loans that have variable rates can go up over the life of the loan. Federal student loans are required by law to provide a range of flexible repayment options, including, but not limited to, income-based repayment and income-contingent repayment plans, and loan forgiveness and deferment benefits, which other student loans are not required to provide. Federal loans generally have origination fees, but are available to students regardless of income.