How to calculate interest on a student loan

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If you’ve recently graduated or left college, you might be surprised at how much your student loan repayment is spent only on the interest portion of your debt. To understand why, you must first understand how this interest accumulates and how it is applied with each payment.

Key points to remember

  • Federal loans use a simple interest formula to calculate your finance charges; however, some private loans use compound interest, which increases your interest costs.
  • Some private student loans have variable interest rates, which means you can pay more or less interest at a later date.
  • With the exception of federal subsidized loans, interest generally begins to accrue when the loan is disbursed.

3 steps to calculate your student loan interest

Figuring out how lenders charge interest for a given billing cycle is actually pretty straightforward. All you have to do is follow these three steps:

Step 1. Calculate the daily interest rate

You first take the annual interest rate on your loan and divide it by 365 to determine the amount of interest that accrues daily.

Suppose you owe $ 10,000 on a loan with 5% annual interest. You would divide this rate by 365 (0.05 ÷ 365) to get a daily interest rate of 0.000137.

Step 2. Identify your daily interest charges

You then need to multiply your daily interest rate in Step 1 by your outstanding principal of $ 10,000 (0.000137 x $ 10,000) to determine the amount of interest you are charged each day. In this case, you are charged interest of $ 1.37 daily.

Step 3. Convert it to a monthly amount

Finally, you will need to multiply this daily interest amount by the number of days in your billing cycle. In this case, we’ll assume a 30-day cycle, so the amount of interest you would pay for the month is $ 41.10 ($ 1.37 x 30). The total for one year would be $ 493.20.

Interest starts to accrue this way from the time your loan is disbursed, unless you have a federal subsidized loan. In this case, you will not be charged interest until after your grace period, which lasts six months after you leave school, has ended.

With unsubsidized loans, you can choose to pay back the accrued interest while you are still in school. Otherwise, accrued interest is capitalized or added to principal after graduation.

If you apply for and get forborne (essentially a pause in your loan repayment, usually for about 12 months), keep in mind that while your payments may stop while you are forborne, interest will continue to rise. accumulate during this period. and will eventually be added to your capital. If you are in economic hardship (which includes being unemployed) and you go into deferral, interest only continues to accrue if you have an unsubsidized or PLUS loan from the government.

Interest on student loans from federal agencies and under the Federal Family Education Loans (FFEL) program was initially suspended until September 30, 2021, through an executive order signed by President Biden on first day of his term. The last extension of the suspension deadline is now January 31, 2022. Borrowers should be noted that although this is the fifth time that the deadline has been extended, the Department of Education has specifically indicated that it is ‘would act from the last extension.

Simple interest versus compound interest

The above calculation shows how to calculate interest payments based on what is called a simple daily interest formula; this is how the US Department of Education deals with federal student loans. With this method, you pay interest as a percentage of the principal balance only.

However, some private loans use compound interest, which means that the daily interest is not multiplied by the principal amount at the start of the billing cycle – it is multiplied by the principal outstanding. more any unpaid interest accrued.

So on day 2 of the billing cycle, you don’t apply the daily interest rate — 0.000137, in our case — to the $ 10,000 principal you started the month with. You multiply the daily rate by the principal and the amount of interest accrued the day before: $ 1.37. It works well for banks because, as you can imagine, they collect more interest when they compose it this way.

The calculator above also assumes a fixed interest over the life of the loan, which you would have with a federal loan. However, some private loans have variable rates, which can go up or down depending on market conditions. To determine your monthly interest payment for any given month, you should use the current rate you are charged on the loan.

Some private loans use compound interest, which means the daily interest rate is multiplied by the initial principal for the month more any unpaid interest charges that have accrued.

About depreciation

If you have a fixed rate loan, whether through the Federal Direct Lending Program or a private lender, you may notice that your total payment remains unchanged, even with the principal outstanding, and therefore the fees. interest, go from one month to the next.

This is because these lenders amortize or spread the payments evenly over the repayment period. As the interest portion of the bill continues to decline, the amount of principal you pay back each month increases by a corresponding amount. Therefore, the overall bill remains the same.

The government offers a number of income-based repayment options that are designed to reduce payment amounts early on and gradually increase them as your salary increases. At first, you may find that you are not paying enough on your loan to cover the amount of interest accrued during the month. This is called “negative damping”.

With some plans, the government will pay all, or at least part, of the accrued interest that is not covered. However, with the Income-Based Repayment Plan (ICR), overdue interest is added to the principal amount each year (although it stops being capitalized when your loan balance is 10% greater than the amount of. your initial loan).

Student loan interest faqs

Who Sets Federal Student Loan Rates?

Interest rates on federal student loans are set by federal law, not by the US Department of Education.

Should I consolidate for a better rate?

It depends. Loan consolidation may just be your life but you need to do it with care to avoid losing any benefits that you might currently have under the loans you take out. The first step is to determine if you qualify for consolidation. You must be enrolled in less than part-time status or not be in school; currently making loan payments or being in the grace period of the loan; not to be in default; and raising at least $ 5,000 to $ 7,500 in loans.

Can I deduct the interest on a student loan?

Yes. Individuals who meet certain criteria based on deposit status, income level and amount of interest paid can deduct up to $ 2,500.

Final result

Figuring out how much interest you owe on your student loan is a straightforward process, at least if you have a standard repayment plan and a fixed interest rate. If you want to reduce your total interest payments over the course of the loan, you can always check with your loan officer to see how the different repayment plans will affect your costs.


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