Learning to calculate interest on student loans helps to understand what you are actually paying for university debt. Interest on federal student loans and many private student loans are calculated using a simple daily interest formula.
To calculate the amount of student loan interest that accrues monthly, calculate your daily interest rate and multiply it by the number of days since your last payment. Then multiply that by the balance of your loan.
How to calculate student loan interest
To see how to calculate student loan interest in practice, take out your pen and paper and follow it with the following example. Not a mathematician? Our tool below does the math for you.
For this example, suppose you borrow $ 10,000 at an annual interest rate of 7%. On a standard 10-year repayment plan, your monthly payment would be around 116 €.
1. Calculate your daily interest rate (sometimes called the interest rate factor). Divide the annual interest rate of your student loan by the number of days of the year.
0.07 / 365 = 0.00019 or 0.019%
2. Calculate the amount of interest on your loan per day. Multiply your loan balance by your daily interest rate.
€ 10,000 x 0.00019 = € 1.90
3. Find your monthly interest payment. Multiply the amount of your daily interest by the number of days since your last payment.
€ 1.90 x 30 = € 57
For a student loan with a normal repayment status, interest is charged daily but is generally not compounded daily. In other words, you pay the same amount of interest per day for each day of the payment period; you do not pay interest on the interest accumulated the day before.
Capitalization increases interest costs
In most cases, you will pay all the accrued interest each month. But there are some scenarios in which unpaid interest accrues and is capitalized or added to your principal loan balance. Capitalization makes you pay interest in addition to interest, which increases the total cost of the loan.
For federal student loans, the capitalization of unpaid interest occurs:
- When the grace period ends on an unsubsidized loan.
- After a period of abstention.
- After an adjournment period, for non-subsidized loans.
- If you leave the Pay-as-Earn-Revised plan, Pay-as-Earn (PAYE) or the Income-Based Reimbursement Plan (IBR).
- If you do not recertify your income each year for the REBAYER, PAYE and IBR plans.
- If you are no longer qualified to make payments based on your income according to PAYE or IBR.
- Annually, if you have a repayment plan based on your income.
For private student loans, the capitalization of interest usually occurs in the following situations, but check with your lender for confirmation.
- At the end of the grace period.
- After a period of postponement.
- After a period of abstention.
To avoid capitalization of interest, repay the accumulated interest while you are in school before you begin repayment and avoid postponement or abstention. If you follow an income-tested federal student loan repayment plan, do not forget to certify your income each year.
When do I begin to accumulate interest?
The interests of student loans are usually daily and start as soon as your loan is disbursed. In other words, student loans generally generate interest during your studies.
Subsidized federal loans are an exception: the government pays the accrued interest while the borrower is in school. As a result, borrowers generally do not have to start paying interest on subsidized loans before the end of the six-month grace period.
How student loan payments are applied
Loan officers generally apply payments in the following order:
- Unpaid fees
- Exceptional interest
- Main loan
Using the previous example, with a monthly payment of € 116 – and assuming no fees are charged – € 57 would go to interest and € 59 to principal.