How to calculate student loan interest in 3 easy steps

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Calculating how much interest you’ll pay on your student loans will help you determine what your monthly budget looks like and how long you’ll be paying off your college debt. To calculate your student loan interest, all you need to do is find your daily interest rate, determine your daily interest accrual charge and calculate your monthly payment.

How to calculate your student loan interest

Figuring out how much of your student loan payment goes toward interest is fairly simple, especially if you have a fixed interest rate. Some private student loans have a variable interest rate, meaning that your interest could fluctuate throughout the life of your loan. Also, interest may compound — meaning you’re charged interest on both the principal and any unpaid interest. If this is the case with your student loans, you’ll likely have a higher interest charge.

The example below shows how to calculate interest on a student loan with a standard repayment period and a fixed interest rate. If you took out a private loan, you can ask your loan servicer about the best repayment option for your type of loan.

1. Find your daily interest rate

First, divide the annual interest rate on your student loan by the number of days in a year (365). If you borrow $10,000 with 6 percent annual interest, that calculation would look like this:

0.06 (annual interest rate) / 365 (number of days in a year) = 0.000164, or 0.016 percent in daily interest

2. Determine your daily interest accrual charge

You’ll then multiply your daily interest rate by your outstanding loan balance, or principal balance, of $10,000. This will determine your daily interest accumulation rate.

0.000164 (daily interest rate) x $10,000 (outstanding loan balance) = $1.64 in daily interest

3. Calculate your monthly payment

For the last step, you’ll need to multiply your daily interest by the number of days in your billing cycle.

Let’s assume that you’re billed on a 30-day cycle. To calculate your monthly payment, you’d make the following calculation:

$1.64 (daily interest) x 30 (number of days in billing cycle) = $49.20 in total monthly interest

Other things to consider about student loan interest

The example above is the simplest way to calculate interest, but it doesn’t apply to all types of loans. Your interest charges may vary based on interest accrual, interest type and amortization.

Interest accrual

Typically, student loan interest starts accruing the day that your loan is disbursed. However, this can vary based on the type of loan that you take out. If you have received Direct Subsidized Loans, the federal government will pay your interest while you’re in school and for the six-month grace period after you leave college.

If you take out Direct Unsubsidized Loans, Direct PLUS Loans or private loans, the interest will accrue while you’re in school and will not be paid by the federal government. If you fail to make the interest payments, the interest capitalizes and is later added to your principal balance. Capitalization frequency can vary depending on the type of loan.

Interest on federal student loans is currently suspended through Sept. 30, 2021 due to the coronavirus. Keep in mind that the suspension of student loan interest rates does not apply to private loans, only federally owned student loans.

Simple vs. compound interest

There are two main ways that interest can be calculated on your loans. Simple interest means that the interest rate is applied to your original loan balance only, so your interest costs will be more predictable.

Compound interest means that you pay interest on the balance of your loan combined with any interest that accrued in the previous compounding period. With this type of interest, you end up paying interest on your interest.

Amortization

Student loans follow an amortization schedule, which means that the amount of interest you pay on your loans each month will decrease over time – in other words, a larger portion of your monthly payment will go toward interest in the early months of repayment but will shrink over time. As the interest portion of each payment decreases, the portion that applies to the principal balance increases, accelerating progress in paying off the loan balance.

Say you have a $10,000 loan on a 10-year repayment plan and an interest rate of 6 percent. A student loan calculator will show you that your monthly payment will be $111.02. In the first month of repayment, $50 of that will go toward interest and $61.02 toward the principal. In the final month of repayment, however, only $0.55 will go toward interest and $110.47 will go toward the principal.

Will student loan interest rates go down in 2021?

While federal student loan interest rates went down last year due to the pandemic, they are almost a full percentage point higher for the 2021-22 school year:

  • Direct Loans for undergraduates: 3.73 percent.
  • Direct Unsubsidized Loans for graduates and professionals: 5.28 percent.
  • Direct PLUS Loans: 6.28 percent.

Even though federal student loan rates have risen, they are still fairly low compared to prepandemic levels.

This may also translate to private student loan rates staying low in 2021. The federal government does not have direct control over private student loan rates, but decisions made by the federal government may indirectly affect private loans. This is because private student loan rates are tied to the Libor index or the prime rate.

Student loans under the Biden presidency

Student loan interest rates may be going up, but President Biden has suggested several changes that could help student loan borrowers find relief from their debt.

Here are a few of the big changes Biden has made for student loans so far:

  • Extension of the federal loan forbearance period. One of Biden’s first actions as president was to extend the federal student loan payment and interest pause through Sept. 30, 2021.
  • Expanded relief to all FFEL loans in default status. Defaulted FFEL loans are now included in the interest rate and payment pause, with relief retroactively applied to March 13, 2020.
  • Tax-free student loan forgiveness. As part of the American Rescue Plan, all student loan debt that is forgiven through the end of 2025 will not be taxed.
  • Eased documentation for borrower defense to repayment. If your college or university engaged in certain misconduct, you can apply to have your student loans discharged. Recent changes in documentation requirements have made it easier for borrowers to access that forgiveness.

There are still a few big promises for student loans that Biden has yet to make happen. Here are the big ones:

  • On the campaign trail, Biden promised to forgive $10,000 in federal student loans per borrower, although this item was not included in his budget proposal for 2022.
  • Biden’s budget proposal includes plans to raise the maximum Pell Grant amount by $1,875.
  • Biden wants to provide two years of community college tuition-free for everyone.
  • The U.S. Department of Education is currently investigating ways to improve existing student loan forgiveness programs like Public Service Loan Forgiveness.

Next steps

If you are considering borrowing money for school, the next step is to shop around to find the best student loan for you. Comparing offers and rates is a crucial step before applying for a loan. You can use a student loan calculator to estimate how long it will take you to pay off your desired loan and to calculate your student loan interest. It’s also always beneficial to speak with a financial advisor about creating a budget that works with your interest rate and loan type, especially if you’re borrowing a private loan.

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Written by
Emma Woodward
Contributing writer
Emma Woodward is a freelance writer who loves writing to demystify personal finance topics. She has written for companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet.
Edited by
Student loans editor
Reviewed by
Mark Kantrowtiz
Nationally recognized student financial aid expert