How to calculate student loan interest in 3 easy steps

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Knowing exactly how much interest you’ll be paying on your student loans can 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. All you need to do is follow the three steps in the example below.

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

Keep in mind that some private loans have a variable interest rate, meaning that your interest could fluctuate throughout the life of your loan. Also, some private loans charge 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 interest charge.

The example above 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.

Next steps

If you are considering starting 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 also use Bankrate’s student loan calculator to estimate how long it will take you to pay off your desired loan.

If you’ve already completed school, you’ll need to get an idea of how long it will take to pay off your college debt. Calculating your student loan interest is the first step in that process. You can use the example above as reference, or you can use the loan interest calculator for loans with fixed or simple interest. It’s also always beneficial to speak with a financial adviser about curating a budget that works with your interest rate and loan type, especially if you’ve borrowed a private loan.

Frequently asked questions about student loan interest

When does interest accrue?

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.

As of March 13, 2020, interest on federal student loans has been suspended through Sept. 30 due to the coronavirus. Keep in mind that the suspension of student loan interest rates does not apply to private loans, only federal student loans.

Will student loan interest rates go down in 2020?

Due to recent Federal Reserve interest rate cuts, loan interest rates in general have seen a decline. Federal student loans in particular are seeing some of the lowest interest rates on record for the 2020-21 school year.

This may translate into student loan rates going down in 2020. Even though the federal government does not have direct control over private student loan interest rates, decisions made by the federal government may translate into decreasing student loan interest rates, since private student loan rates are tied to the prime rate.

Featured image by Jasminko Ibrakovic of Shutterstock.

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