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2026-11-10

Student Loans: The Clock That Starts in Class

Finance For Dummies
Finance For Dummies@J.Ellis
Student Loans: The Clock That Starts in Class

Imagine the letter that lands in your mailbox in spring. Tuition at the top, twenty-eight thousand dollars. Then a sentence saying you are covered. Then, in the smallest type on the page, one word. Loans.

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The smaller print on the aid letter

A student loan is money you borrow and repay with interest. On Direct Subsidized and Direct Unsubsidized Loans first disbursed between July 1, 2026 and June 30, 2027, the fixed undergraduate rate is 6.52 percent, and that rate holds for the life of the loan. 1
A worked example, with invented numbers: $30,000 at 6.52 percent over ten years costs about $341 a month, and ten years of those payments comes to roughly $40,900, about $10,900 of it interest.
Federal student loans also charge a loan fee, and it is taken out before the money reaches you. For Direct Subsidized and Unsubsidized Loans the fee is 1.057 percent of the amount borrowed, so a $5,500 loan delivers about $5,442 and the full $5,500 still has to be repaid. 1

Subsidized and unsubsidized are about whose clock runs

Direct Subsidized Loans are for undergraduates with financial need. The Department of Education pays the interest while you are enrolled at least half time, for the first six months after you leave school, and during a deferment. 2
Direct Unsubsidized Loans are open to undergraduate, graduate and professional students, with no financial-need requirement, and the borrower is responsible for the interest in every period, school included. 2 Federal loans accrue interest daily, and the department's own example has $10,000 at 6.8 percent adding $1.86 a day. 1

What happens to interest nobody pays

Unpaid interest can be capitalized, meaning it is added to the principal and the interest is then recalculated on the larger balance. In that same example, six months of unpaid interest comes to about $340; afterward the balance is $10,340 and the daily interest is $1.93. 1
No payment goes toward principal until the unpaid interest has been cleared. 1 Left alone across four years of borrowing $5,500 a year, that arithmetic produces roughly $24,000 owed against $22,000 borrowed.

Six months, then a plan you choose

After you graduate, leave school or drop below half-time enrollment, a six-month grace period comes before repayment starts, and the servicer uses it to send the balance, the rate and the first due date. 2
Four plans do most of the work. Standard clears the loan in ten years. Graduated starts lower and steps up about every two years. Extended stretches to 25 years and requires more than $30,000 in outstanding Direct Loans. Income-driven plans set the payment from income and family size, and the borrower recertifies every year. 3
Remaining balances can be discharged after enough qualifying payments: 20 or 25 years under income-driven plans, or 10 years through Public Service Loan Forgiveness after 120 qualifying payments. 4 A borrower who chooses nothing is placed on a fixed schedule, which for loans disbursed on or after July 1, 2026 is the Tiered Standard Plan. 3

If the payments stop

A federal loan is delinquent from the first day after a missed payment, and a delinquency of 90 days or more is reported to the national credit bureaus. 5 Default follows 270 days without a payment on Direct and FFEL loans, while private loans often default after four missed monthly payments, about 120 days. 4
In default the entire unpaid balance becomes due at once, tax refunds and federal benefit payments can be withheld, wages can be garnished, deferment and forbearance are no longer available, and new federal student aid is closed off. 5 The two main routes back are loan rehabilitation and consolidation. 5 Contacting the servicer before that point is what keeps those options open; deferment and forbearance can pause payments, and interest generally keeps accruing through them. 4

What to ask before signing

Which kind of loan it is. What the rate is, and whether it is fixed. What the monthly payment will be once the grace period ends.
Then the amount. The maximum offered is an option rather than an obligation, and the Consumer Financial Protection Bureau's guideline is to keep total borrowing below what you expect to earn in your first year after school. 6
Private loans differ from federal ones in ways that matter later: rates may be variable, repayment terms are generally less flexible, and the hardship options are more limited, which is why the bureau recommends exhausting federal options first. 7
This show is educational only and is not registered investment advice. The loan figures above are illustrative arithmetic rather than quoted terms, and no lender or loan product is being recommended.

References

  1. 1
    Federal Student Aid: Interest rates and fees

    studentaid.gov

  2. 2
    Federal Student Aid: Subsidized and unsubsidized loans

    studentaid.gov

  3. 3
    Federal Student Aid: Repayment plans

    studentaid.gov

  4. 4
    CFPB: Student loans key terms

    consumerfinance.gov

  5. 5
    Federal Student Aid: Delinquency and default

    studentaid.gov

  6. 6
    CFPB: How much should I borrow in student loans?

    consumerfinance.gov

  7. 7
    CFPB: Ways to pay for college or graduate school

    consumerfinance.gov

Finance For Dummies
Finance For Dummies@J.Ellis

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