What is Interest? Interest is the fee for borrowing money.
The interest rates for Direct Subsidized Loans, Direct Unsubsidized Loans and Direct PLUS Loans are calculated each year for first disbursements on or after July 1 through June 30. The annual interest rate is based on the 10-year T-Bill, plus a statutorily defined “add-on” that varies by your type of loan and whether you are an undergraduate or graduate/professional student.
To better understand the effects of interest on your federal student loan, it is important to know the different types of interest:
A fixed interest rate does not change over the term of a loan. Once your interest rate is set, it will remain the same over the life of your loan.
A variable interest rate can rise and fall over the term of a loan. Your variable interest rate can fluctuate over the life of your loan on the basis of changes in the market rates of interest.
Accrued interest is the interest that accumulates on your unpaid principal balance each day. To help calculate your daily accrued interest, take your (principle balance) x (interest rate) / 365.
- Capitalized interest is unpaid, accrued interest that is added to the principal balance of your loan. When interest is capitalized, your total debt increases. We encourage you to make interest payments on your federal student loans, even when you are not required. By making interest payments, you can save yourself a considerable amount of money over a standard 10-year repayment period.