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How to calculate student loan interest

College student studying in library.
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College student studying in library.
Jasminko Ibrakovic/Shutterstock
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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. To calculate your student loan interest, you need to find your daily interest rate, determine your daily interest accrual charge and calculate your monthly payment. Here’s how.

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 change 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 total 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 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 added to your loan 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.

Also keep in mind that the federal government has set interest rates at 0 percent and paused payments on federal student loans through Aug. 31, 2022. Because of this, interest is currently not accruing on federally owned student loans.

What is interest capitalization?

Interest capitalization is 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.

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 former contributor for Bankrate and 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
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Part of  Student Loan Interest Rate Basics