Can You Make Interest-Only Payments on a Federal Student Loan?
Many federal student loans don’t require any payment at all while a borrower is still in school, which makes it easy to overlook that paying just the interest during that time is often available and can matter quite a bit later.
The short answer
Some federal student loans allow a borrower to make interest-only payments during periods when full payments aren’t yet required, such as while enrolled in school or during a grace period after leaving. Making these interest-only payments keeps the accruing interest from being added to the loan’s principal, which is what happens by default if nothing is paid during that time. It’s an optional choice available to borrowers who want to limit how much the loan grows before regular repayment begins.
Why this option exists
Unsubsidized loans and PLUS loans generally accrue interest from the time they’re disbursed, even while a borrower is still in school and not yet required to make payments. If that interest isn’t paid as it accrues, it typically gets added to the loan’s principal balance once repayment starts, a process called capitalization. Making interest-only payments during school or a grace period is a way to prevent that growth, since the borrower is paying the interest as it’s charged rather than letting it accumulate and get folded into a larger principal later.
What capitalization actually costs
The effect of capitalized interest is that future interest is then calculated on a larger balance, since the loan’s principal has grown to include what was previously just accrued interest. Over the life of a loan, that compounding effect can add up, particularly for loans that spend several years accruing interest before regular payments begin. This is illustrative math rather than a forecast, since actual amounts depend on loan terms and rates that are set by the lender and change over time, but the underlying mechanic — interest paid now doesn’t become interest charged on interest later — holds regardless of the specific numbers.
Weighing whether to make interest-only payments
- Consider what else the money could do. Making interest-only payments while still a student means committing cash during a period when income may be limited, so it’s worth weighing against other financial priorities at the time.
- Ask the servicer how payments are applied. Confirming that a payment is specifically applied to accruing interest, rather than sitting as a general credit, matters for the payment to have its intended effect — this connects to the broader order in which a servicer applies payments.
- Check whether the loan type allows it. Not all loans accrue interest during in-school periods, since subsidized loans generally don’t — interest-only payments are most relevant to unsubsidized and PLUS loans specifically.
- Decide based on the full timeline, not just the moment. A small interest-only payment made consistently over several years in school can meaningfully change the size of a loan at the start of repayment.
The bottom line
Interest-only payments are a genuine, optional tool for borrowers who want to slow how much a federal loan grows before regular repayment kicks in, not a special program that needs to be applied for. Understanding which loans accrue interest early and how capitalization works turns an easy-to-miss option into a deliberate part of managing a student loan from the start.