Note that the government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period and no loans to be held delinquent or in default.
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Postponing federal student loan payments through deferment or forbearance can bring much-needed relief to your finances. But deferred loans do accrue interest, unless they’re subsidized. Plus, interest will still accrue on your loans during forbearance, regardless of whether they’re subsidized or unsubsidized.
Because your interest costs will add up (and may be added on to your principal balance when you resume repayment), it’s a good idea to pay student loan interest while in deferment or forbearance if you can help it. Alternatively, you could simply adjust payments by applying for an income-driven repayment plan instead.
Let’s look at these three questions:
All federal student loans accrue interest in forbearance, and unsubsidized loans accrue interest during deferment. The only loans that don’t accrue interest during deferment are subsidized student loans, Perkins loans and the subsidized portion of Direct or FFEL consolidation loans.
Because your balance will likely keep growing, you have two choices for dealing with the interest that is charged each month.
Option 1: Paying student loan interest while in deferment or forbearance
One option is to pay only the interest as it accrues. As you’ll see below, this is the most cost-effective option and can prevent your total loan balance from ballooning when the deferment or forbearance period is over.
Unfortunately, this isn’t an option for everyone.
“This is a cash flow issue for most students and families,” noted Fred Amrein, founder of College Affordability LLC. “If a family or student borrowed the money, then they most likely do not have the funds to pay the interest.”
If you borrowed because you didn’t have extra money to pay for school, even if you wanted to pay the interest, you may simply not have funds available to do so. This would leave you no choice but to use the second option.
Option 2: Allow interest to accrue without paying it
The other option is to not pay the interest and instead allow it to continue accruing without paying it. If you do this, the interest is capitalized — rolled into your loan’s principal balance — in almost all circumstances (note that unpaid interest is not capitalized on Perkins Loans).
If you decide not to make payments toward the accruing interest, it will capitalize at the end of your forbearance period. Our student loan deferment calculator can help you determine the amount of interest that will accrue and capitalize during forbearance.
Let’s look at an example of how making interest payments versus allowing interest to capitalize affects the total cost of your debt:
Say you owe $35,000 in student loans at a 5.70% interest rate and you’re on the 10-year Standard Repayment Plan. You enter forbearance for one year and pay no interest during that time.
In this case, a total of $1,995 in interest would accrue over the year. This would be added to the $35,000 you originally owed. You’d end the forbearance period with a new loan balance of a little over $36,995 (because interest accrues daily), and going forward, you would pay interest on this higher loan balance. Essentially, you’d pay interest on the interest that built up while you were in school.
Now let’s look at this example again, except let’s assume you make interest payments during forbearance. By paying the $1,995 in interest that accrued during the year of forbearance, you’d prevent it from capitalizing. When your forbearance period ended, you’d still owe $35,000, and the payments and interest you’d make over the next decade would be based on a lower initial loan amount.
Because student loan forbearance does not stop interest from accruing on loans, it often makes sense to pay the interest while your loans are in forbearance, if it’s financially feasible.
“With interest rates being so low, students are not earning much interest on their savings,” said Peter Bielagus, financial author and speaker. “A great way to ‘save’ money is to stop losing it. Making even just a $10 payment here and there on a student loan with a 5% interest rate should be viewed as ‘earning’ 5% on that $10.”
But despite the substantial savings and the fact that paying interest would prevent you from increasing your student loan debt burden in forbearance, there are a couple situations where paying interest during forbearance doesn’t make sense.
One example is when you’re trying to pay other higher interest debt: “If a student owes $10,000 at 5% on a student loan and $3,000 at 18% on a credit card, it makes more sense to attack the credit card first,” Bielagus said.
Another situation where it doesn’t make sense to pay interest while you’re in forbearance is when you’re not planning on paying back your loans in full. According to Amrein, “if the borrower will qualify for Public Service Loan Forgiveness, it makes no sense to make that interest payment.”
It wouldn’t make sense to repay the interest then because it doesn’t matter if your loan balance is higher at the end of forbearance. The interest that’s tacked on just means more debt will be forgiven after you meet the requirements for loan forgiveness.
If you plan to repay your loans based on an income-driven repayment plan, you may assume it doesn’t make sense to pay interest in forbearance, since your monthly payment is capped based on your income — so it might not be higher because of the capitalized interest. However, if your total loan balance is higher and you pay off less of it, a larger amount will be forgiven — and you’ll be hit with a bigger tax bill, since you’re taxed on the forgiven amount.
For the millions of students in forbearance, there is no one right answer on whether to pay interest or not. Ultimately, every borrower’s situation is different.
For many in forbearance, if you can afford to make payments and you’re not going to use Public Service Loan Forgiveness, it makes sense to save yourself money by paying the interest.
It might also be a better option to put your loans on income-driven repayment. Depending on your income, your loans could be as low as $0 per month, but you’ll still be making progress toward the end of your repayment term.
Whether you’ve paid interest during deferment or forbearance or you haven’t, you could potentially save on your loan by refinancing and reducing your interest rate once you begin repaying your loans.
Still, refinancing may not make sense for everyone, as private loans typically don’t offer forbearance or deferment; you could be in financial trouble if you can’t pay your loan again in the future.
However, if you’re confident you can make your loan payments going forward and want to explore your options, there are a number of choices to refinance your student loans and potentially reduce the total interest you must pay over the life of the loan.
Rebecca Safier contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2022!
|Lender||Variable APR||Eligible Degrees|
|2.49% – 11.72%1||Undergrad & Graduate|
|2.50% – 6.30%2||Undergrad & Graduate|
|4.13% – 7.39%3||Undergrad & Graduate|
|2.49% – 7.99%4||Undergrad & Graduate|
|2.49% – 7.99%5||Undergrad & Graduate|
|3.24% – 8.24%6||Undergrad & Graduate|
|2.48% – 7.98%||Undergrad |
|1.74% – 7.99%7||Undergrad & Graduate|
|3.69% – 9.92%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 6, 2022.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $9 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
3 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 09/09/2022 student loan refinancing rates range from 4.13% APR – 7.39% Variable APR with AutoPay and 2.99% APR – 9.93% Fixed APR with AutoPay.
4 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.
5 Important Disclosures for Navient.
6 Important Disclosures for SoFi.
Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
7 Important Disclosures for Purefy.
Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.
8 Important Disclosures for Citizens.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from 4.49%-10.11% (4.49%-10.11% APR).
Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).
Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).
Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).
Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).