How to calculate student loan interest

Before you take out student loans to pay for the costs of higher education, it’s important to understand the impact interest has on the money you borrow. The interest on federal student loans for undergraduates is set each year. For the 2024-25 school year, the interest rate is 6.53 percent. The rate on private student loans, on the other hand, generally depends on the lender but typically ranges from just over 4 percent to 18 percent.

By clearly understanding how to calculate student loan interest, you can determine what your student loan payment will look like after graduation. This can come in handy when you’re trying to determine whether your student loan repayments will fit in your future budget. You can also use this information to determine how much money you need to put toward your loans each month to pay them off faster.

How to calculate your student loan interest

So how is student loan interest calculated? Most student loans use a simple interest formula. This formula essentially multiplies three factors: your student loan’s daily interest rate, 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.

Though less common, some lenders charge compound interest. In other words, you’re charged interest on the principal and any unpaid interest. If that’s the case with your student loans, you’ll likely have a higher total interest charge.

1. Find your daily interest rate

To calculate student loan interest, first, divide the annual interest rate on your student loan by the number of days in a year (365). For example, if you borrow $10,000 with 6 percent annual interest and a standard repayment term of 10 years, that calculation would look like this:

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.

3. Calculate your monthly payment

For the last step, 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:

How student loan payments are applied

When you make a payment on your student loan, the money is first used to cover any accrued interest, with the remainder going to reduce the principal balance. It’s important to understand that government student loans come with a fixed interest rate, but private student loans might have interest rates that are either fixed or can change over time.

What other factors can affect your student loan interest calculation?

Beyond the interest rate on your loan, a few other factors impact your student loan interest calculations and the amount of interest you will pay.

Interest capitalization

There are cases however when paused interest will be added to the principal loan balance you are responsible for paying. When this occurs, it is known as interest capitalization.

In cases where you aren’t on the hook for loan payments until after you leave school, for instance, interest still accrues on your debt while you’re enrolled. This interest capitalization increases your outstanding loan balance, and then interest is charged on the new, larger amount owed.

To avoid interest capitalization, you can start paying 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 discount your interest rate if you choose interest-only payments during school.

Amortization

Student loans follow an amortization schedule. So, 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 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.

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.

Paused interest

The federal government set interest rates at 0 percent and paused payments on federal student loans for over three years in response to the coronavirus pandemic.

However, the U.S. Supreme Court blocked the Biden Administration’s plan to forgive up to $20,000 in student loan debt on June 30, 2023. As a result, interest accrual on federal student loans began again on Sept. 1, 2023, and payments resumed in October of that same year.

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

If you want to reduce how much you’ll owe in interest once you graduate, the best thing you can do is make payments while in school. These can be interest-only payments. Once your grace period ends, try enrolling in automatic payments. Most lenders offer a 0.25 rate discount just for choosing this option.

You can also look into refinancing. Refinancing can help you reduce your interest rate by allowing you to secure a lower rate than your current one. But for this to work, you’ll need to have good credit and a stable source of income.

Additionally, this option is best suited for those who have private student loans with a higher rate. That’s because refinancing your federal loans turns them into private ones. If that happens, you’ll lose access to benefits like income-driven repayment plans and forgiveness programs.

The bottom line

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 student loan type, especially if you’re borrowing a private loan.

Frequently asked questions

• Is student loan interest calculated monthly or yearly?

  Interest accrues daily on federal student loans. However, when doing the math to determine how much interest you will ultimately pay, student loan interest is calculated monthly, multiplying your daily interest by the number of days in your monthly billing cycle.

• What are typical interest rates for student loans?

  Rates for undergraduate student loans hit an all-time high in the 2024-2025 academic year, with a 6.53 percent interest rate for undergraduate federal loans (previously 5.5 percent). For graduate direct unsubsidized loans, the interest rate is 8.08 percent (previously 7.05 percent). Private loans range from 4 to 18 percent depending on the lender, type of education, borrower creditworthiness, and other factors.
  

• Is student loan interest deductible?

  Yes, you may deduct from your taxable income the lesser of $2,500 or the amount of interest you paid during a calendar year. However, the deduction is gradually decreased and phased out entirely based on your modified adjusted gross income (MAGI). Interest is deductible for those whose MAGI is less than $90,000 or less than $185,000 for those who file jointly.