things no one ever taught me: how student loans actually work (and what they don’t tell you)

August 5, 2025

Student loans can feel like free money—until they don’t. If you're still in school or recently graduated, it's important to understand how interest works before you're hit with sticker shock.

Most federal student loans begin accruing interest the moment they’re funded, even if you don’t have to make payments yet due to deferment. Unless you have a subsidized loan – a loan for which the federal government pays the interest while you are in school - interest keeps piling up while you're in school or in a grace period. Worse yet? That interest often gets added to your principal (the amount you owe before interest) when repayment starts. So now you're paying interest on your interest.

Income-driven Repayment Plans

Many borrowers choose income-driven repayment plans - payments are based on how much money you make and not how big the loan is - after graduation, because the monthly payment feels manageable. But here's the catch: if your payment is too low to cover the interest, the unpaid amount doesn’t just disappear. It accumulates. Your balance may actually grow year after year, even if you never miss a payment.

Something else to beware of is your student loan being sold to another company. This is fairly common and may change your loan terms or other expectations for repayment. Read your loan paperwork carefully when this happens.

Tips for repaying student loans

·       If you can afford it, pay at least the accruing interest during deferment.

·       Reevaluate your repayment plan annually—not just when required.

·       Set reminders for recertifying your income (missed deadlines can kick you off your plan).

·       Consider extra payments toward principal, even small ones, early on.

Student loans aren’t just about what you borrow. They’re about how interest behaves quietly in the background—and how long-term plans can lead to long-term debt without a strategy.

Knowledge is power. Don’t let deferment or low payments lull you into a growing balance. Also, be sure to make your payments on time. Late payments are reported to the credit bureaus and will lower your credit score.

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