Calculate Student Loan Interest, Step by Step

Learning how to calculate student loan interest will help you understand what you’re really paying for college debt
Teddy Nykiel
By Teddy Nykiel 
Edited by Des Toups
Calculate Student Loan Interest, Step by Step

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Learning how to calculate student loan interest will help you understand what you’re really paying for college debt. Interest on federal student loans and many private student loans is calculated using a simple daily interest formula.

To calculate the amount of student loan interest that accrues monthly, find your daily interest rate and multiply it by the number of days since your last payment. Then, multiply that by your loan balance.

How to calculate student loan interest

To see how to calculate student loan interest in practice, get out your pen and paper and follow along using the following example. Not a math person? Our student loan interest calculator below does the calculation for you.

For this example, say you borrow $10,000 at a 7% annual interest rate. On a 10-year standard repayment plan, your monthly payment would be about $116.

1. Calculate your daily interest rate (sometimes called interest rate factor). Divide your annual student loan interest rate by the number of days in the year.

.07/365 = 0.00019, or 0.019%

2. Calculate the amount of interest your loan accrues per day. Multiply your outstanding loan balance by your daily interest rate.

$10,000 x 0.00019 = $1.90

3. Find your monthly interest payment. Multiply your daily interest amount by the number of days since your last payment.

$1.90 x 30 = $57

For a student loan in a normal repayment status, interest accrues daily but generally doesn’t compound daily. In other words, you pay the same amount of interest per day for each day of the payment period — you don’t pay interest on the interest accrued the previous day.

Student loan interest calculator

Capitalization increases interest costs

In most cases, you’ll pay off all of the accrued interest each month. But there are a few scenarios in which unpaid interest builds up and is capitalized, or added to your principal loan balance. Capitalization causes you to pay interest on top of interest, increasing the total cost of the loan.

For federal student loans, capitalization of unpaid interest occurs:

  • When the grace period ends on an unsubsidized loan.

  • After a period of forbearance.

  • After a period of deferment, for unsubsidized loans.

  • If you leave the Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE) or Income-Based-Repayment (IBR) plan.

  • If you don’t recertify your income annually for the REPAYE, PAYE and IBR plans.

  • If you no longer qualify to make payments based on your income under PAYE or IBR.

  • Annually, if you’re on the Income-Contingent Repayment (ICR) plan.

For private student loans, interest capitalization typically happens in the following situations, but check with your lender to confirm.

  • At the end of the grace period.

  • After a period of deferment.

  • After a period of forbearance.

To avoid interest capitalization, make interest-only student loan payments while you’re in school before you enter repayment and avoid entering deferment or forbearance. If you’re on an income-driven repayment plan for federal student loans, remember to certify your income annually.

When do I start accruing interest?

Student loan interest typically accrues daily, starting as soon as your loan is disbursed. In other words, student loans generally accrue interest while you’re in school.

Subsidized federal loans are the exception — the government pays the interest that accrues while the borrower is in school, so borrowers generally don’t have to start paying interest on subsidized loans until after the six-month grace period.

How student loan payments are applied

Student loan servicers typically apply payments in the following order:

  1. Outstanding fees

  2. Outstanding interest

  3. Loan principal

Using the previous example, with a $116 monthly payment — and assuming no fees — $57 would go toward interest and $59 would go toward principal.

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