Interest on federal student loans is still set to 0%, and repayment of those loans remains paused until litigation surrounding the Biden Administration’s proposed debt relief program is resolved. But if you’re considering taking out student loans to pay education costs, it’s still important to understand the impact of interest on the money you borrow.

Calculating how much interest you’ll pay on student loans will help determine what your student loan payment will look like after graduation. . You can also use this information to determine how much extra cash you need to put toward your loans each month to pay them off faster.

To calculate your student loan interest, you’ll need to find out what your daily interest rate will be, multiply that number by your principal or outstanding balance and finally multiply that figure by the days in your billing cycle.

How to calculate your student loan interest

Figuring out how much of your student loan payment goes toward interest is fairly simple, especially since most student loans use a simple interest formula. This formula essentially multiplies three factors: your student loan’s daily interest rate, your outstanding loan balance and the number of days in your billing cycle.

Most borrowers have federal student loans, which have a fixed interest rate. Private student loans can have either a fixed or variable interest rate. If your loans have a variable interest rate, interest will fluctuate throughout your loan, so you’ll have to readjust your calculations periodically.

Also, some student loans may have compound interest— 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 total interest charge.

The example below shows how to calculate interest on a student loan with a standard 10-year repayment term and a fixed interest rate.

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 about 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) = about $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) = about $49.20 in total monthly interest

When does interest start on student loans?

For most student loans, interest starts accruing immediately after loan funds are disbursed. You often don’t have to start making payments until six months after you graduate or drop below half-time enrollment, but any interest that accrues before that will be capitalized or added to your principal balance.

The exception here is Direct Subsidized Loans, a type of federal student loan offered to students who can demonstrate financial need. With this type of loan, the government covers interest charges during school, the grace period and deferment periods. Because of this, interest technically won’t start until you enter repayment after the grace period.

The federal government set interest rates at 0 percent and paused payments on federal student loans during the coronavirus pandemic and that pause remains in place while litigation surrounding the Biden Administration’s proposed debt relief program is resolved. However, payments are likely to restart and interest rates returned to pre-pandemic levels by late summer. While the pause remains in effect, however, interest is not accruing on federally owned student loans.

What is interest capitalization?

Interest capitalization occurs when your unpaid interest is added to your student loan’s principal balance. Even if you aren’t on the hook for payments until after you leave school, interest still accrues while you’re enrolled. Capitalization increases your outstanding loan balance, and then interest is charged on the new, larger amount owed.

To avoid interest capitalization, you can start making payments on your student loans while in college. It’s not required, but it could save you more money in the long run when it comes time to repay those student loans. Some private lenders even offer a discount on your interest rate if you choose interest-only payments during school.

What is 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 that portion 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.

How can you reduce the interest you will owe on student loans?

If you want to reduce the interest you will owe on student loans once payments restart, you can continue making payments during the pause to bring down the principal balance. Now is a great time to take this step while interest has been set to 0 percent, as all your payments will go toward chipping away at the principal.

In addition, by paying down your principal more aggressively during the pause on interest, you may ultimately shorten the repayment timeline for your student loan debt. A reduced repayment timeline, in turn, can minimize the total interest payments you’ll make over the life of the loan.

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 to ensure you get the best terms and interest rate.

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.