# How to Calculate Interest on Student Loans

Calculating the interest you will 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 charges, and calculate your monthly payment. Here’s how.

## How to calculate your student loan interest

Determining what portion of your student loan payment is for interest is fairly simple, especially if you have a fixed interest rate. Some private student loans have a variable interest rate, which means your interest can change throughout the term of your loan. In addition, interest can be compounded, which means that you are charged interest on both the principal and any unpaid interest. If this is the case with your student loans, you will likely have higher total interest charges.

The example below shows how to calculate student loan interest with a standard repayment period and a fixed interest rate. If you took out a private loan, you can ask your loan manager what the best repayment option is 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% annual interest, this calculation would look like this:

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

### 2. Determine your daily interest charges

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

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

### 3. Calculate your monthly payment

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

Suppose you are billed on a 30 day cycle. To calculate your monthly payment, you would do the following calculation:

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

## When does interest start on student loans?

For most student loans, interest begins to accrue immediately after the loan funds are disbursed. Often you don’t have to start making payments until six months after graduation or below half-time, but any interest accrued before that will be added to your loan balance.

The exception here is Direct Subsidized Loans, a type of federal student loan available to students who can demonstrate financial need. With this type of loan, the government covers interest costs during schooling, grace period and deferment periods. Because of this, interest will technically only start when you enter repayment after the grace period.

Also keep in mind that the federal government has set interest rates at 0% and suspended payments on federal student loans until May 1, 2022. For this reason, interest does not currently accrue on student loans. held by the federal government.

## What is interest capitalization?

Interest capitalization occurs when your unpaid interest is added to the principal balance of your student loan. Even if you are only responsible for payments after you leave school, interest still accrues while you are enrolled. Compounding increases your outstanding loan balance and then charges interest on the new, higher amount owed.

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

## What is amortization?

Student loans follow an amortization schedule, which means that the amount of interest you pay each month on your loans will decrease over time – in other words, more of your monthly payment will go to interest in first months of reimbursement, but this portion will decrease 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.

Let’s say you have a $10,000 loan on a 10-year repayment plan and an interest rate of 6%. A student loan calculator will show you that your monthly payment will be $111.02. During the first month of repayment, $50 of this amount will go to interest and $61.02 to principal. In the final month of repayment, however, only $0.55 will go to interest and $110.47 will go to principal.

## Next steps

If you’re considering borrowing money for school, the next step is to shop around for 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 talk to a financial advisor about creating a budget that’s right for your interest rate and type of loan, especially if you’re taking out a private loan.