Managing educational debt can be challenging, especially when interest accrues daily. Understanding how compound interest works on student loans is essential to managing monthly payments and lowering your total cost over time.

What is Compound Interest in Student Loans?

Compound interest occurs when unpaid accrued interest is added back to your principal loan balance—a process known as interest capitalization. Once capitalized, you start paying interest on both the original principal and the unpaid interest.

When Does Student Loan Interest Capitalize?

  • End of Deferment or Forbearance: When you pause payments, unpaid interest accumulates and gets added to your principal.
  • Grace Period Expiration: After graduating, the interest accumulated during your studies may capitalize when repayment begins.
  • Repayment Plan Changes: Leaving certain income-driven repayment (IDR) plans can trigger capitalization.

Tips to Reduce Student Loan Interest

  1. Pay Interest During School: Making small interest payments while enrolled prevents unpaid interest from capitalizing later.
  2. Set Up Auto-Pay: Many lenders offer an automatic payment discount (typically 0.25%).
  3. Make Extra Principal Payments: Any extra payment made directly toward the principal reduces the total interest computed over time.