Sure, the amount of student loans you take out impacts how much your monthly payments will be. But the interest rate you get is also a key factor. After all, just a few percentage points’ difference can raise or lower your repayments, and how much your loan will cost you in total.

It’s also important to understand how interest is calculated, and how you pay it back as part of your student loans. Here’s the lowdown, including ways you can save on interest.

Interest rates for federal student loans

Federal law determines the eligibility requirements and interest rates on federal student loans. The rate you receive will depend on the type of loan and when the loan funds are paid out.¹

“Federal loans typically have fixed interest rates,” says Tim Melia, a financial planner with Embolden Financial Planning. In fact, all newly issued federal loans have a fixed rate, meaning the interest rate doesn’t change during the loan's lifetime. “Those rates may be lower than those of private lenders,” he adds.

You can check the Federal Student Aid website for the current interest rates for different types of loans.¹

Interest rates for private student loans

With private student loans, your credit history determines your eligibility and interest rate.² If you can’t qualify on your own, you may need a creditworthy cosigner, such as a parent or spouse.³

Private lenders offer loans with both fixed and variable interest rates. While variable-rate loans generally start with lower rates, the interest rate can change while you’re repaying the loan, which can lead to higher monthly payments and paying more overall.

When interest starts and how it’s calculated

Interest starts to accrue once the loan is paid out. However, most federal loans allow you to defer payments while you’re in school at least half-time and during a six-month grace period afterward.⁴ Some private student loans also offer deferment or interest-only payment plans.

As a result, your loan’s total balance might increase while you’re in school. But there is an exception. With subsidized federal student loans, the government pays the interest that accrues while your loan payments are deferred.³

Federal student loans also use simple daily interest, where interest accrues on your loan every day, but the interest doesn’t compound—so you don’t pay interest on interest.1 Private student loans might use simple or compound interest. With the latter, interest will accrue faster the more frequently it compounds.

Interest during deferment and forbearance

After you leave school, if you put your loans in deferment or forbearance or temporarily pause your payments, as with in-school deferments, interest still accrues and the government pays the interest on subsidized federal loans. However, the government doesn't cover the interest during forbearance, and not all private loans offer forbearance or deferment.

When you start making payments again, the accrued interest may be capitalized—meaning interest is added to your loan’s principal balance. Your loan’s interest rate will then apply to your new principal balance.⁵

With the COVID-19 payment and interest pause, however, all eligible federal student loans did not accrue interest from March 13, 2020 through August 31, 2023.⁶

Student loan interest and your taxes

Your interest payments on student loans could lower your taxes for the year. You may be able to deduct up to $2,500 in 2023, says Lawrence Sprung, the founder of Mitlin Financial and author of Financial Planning Made Personal.

However, your eligibility will depend on your modified adjusted gross income (MAGI) and filing status. “This deduction is an above-the-line deduction, which means you do not need to itemize deductions in order to benefit from it,” Sprung says.⁷ This can be beneficial, as itemizing deductions can be time-consuming and not always advantageous from a savings standpoint.

You’ll also want to consider the tax implications if your loans are forgiven, canceled, or discharged. Through the end of 2025, federal income taxes won’t apply. And, even after that, the forgiven or discharged amount only counts as taxable income in certain circumstances.⁸

But the rules could be different at the state level. “It is important that you talk to a tax advisor to see if your state is one that will tax the forgiven amount and plan appropriately for the amount you will owe in tax if they do,” says Sprung.

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1. Studentaid.gov. “ Interest Rates and Fees for Federal Student Loans. ” Accessed July 2023.
2. Consumer Financial Protection Bureau, " What are the interest rates on my student loans?” Accessed July 2023.
3. Studentaid.gov. “ Federal Versus Private Loans.” Accessed July 2023.
4. Studentaid.gov. “ Student Loan Repayment.” Accessed July 2023.
5. Studentaid.gov. “ What is interest capitalization on a student loan?”Accessed July 2023.
6. Studentaid.gov. “ COVID-19 Loan Payment Pause and 0% Interest.” Accessed July 2023.
7. IRS.gov. “ Topic No. 456, Student Loan Interest Deduction.” Accessed July 2023.
8. Studentaid.gov. “ Forgiveness.” Accessed July 2023.