Like virtually any other loan, you’ll have to pay interest if you take out a student loan. Interest is the price lenders charge in return for lending money. When you make a payment on a student loan, part of it will go to the principal while the rest will apply to the interest.
Student loans can have simple or compound interest, which will affect how your lender calculates your interest charges.
Are student loans compound or simple interest?
The majority of student loans — including all federal student loans and most private student loans — operate on simple interest. However, some private loans use compound interest.
- Simple interest is calculated based on the loan amount you originally borrowed.
- Compound interest is calculated based on your loan amount as well as any unpaid interest that has accrued on the loan. Unlike simple interest, compound interest essentially charges you interest on your interest.
Learn More: Average Student Loan Interest Rates
How student loan interest works
The type of interest — simple or compound — affects how your lender will calculate your total student loan interest. Here’s how it works:
Calculating simple student loan interest
Simple student loan interest is calculated using the following formula:
Principal x Interest rate x Loan term = Simple interest
For example: Say you have a $15,000 student loan with a 4% interest rate and a five-year repayment term. The simple interest on this loan would be calculated as 15,000 x 0.04 x 5 = $3,000. This means you’d pay $3,000 in simple interest over the life of the loan.
To see how much your daily interest would be, you’d start by dividing your interest rate by 365 to find your daily interest rate, then multiply this by the principal. In this case, this would look like (0.04 / 365) x 15,000, which equates to about $1.64 in daily interest.
Calculating compound student loan interest
Calculating compound interest is more complicated compared to simple interest. The formula for it looks like this:
(Principal (1 + Interest rate) [Number of compounding periods for a year]) – Principal = Compound interest
For example: Say you have a $20,000 loan with a 5% interest rate and a five-year repayment term. The equation to calculate the compound interest would look like this: (20,000 (1 + 0.05) 5) – 20,000 = 5,525.63
This is how much you’d pay in compound interest over the life of the loan. Keep in mind that how much you’d pay in interest per year would vary because compound interest takes into account the interest that has already accumulated on the loan.
How often the interest compounds — for example, annually, semiannually, or quarterly — will also have a major impact on your total interest charges.
Additionally, with compounding interest, the daily interest will continually be added to your balance and will affect how much you’re charged the following day.
For example: Say you wanted to calculate the daily interest from the above example. To start, you’d first divide your interest rate by 365 to find your daily interest rate — so 0.05 / 365, which equates to about 0.000136. Multiplying this by the principal (0.000136 x 20,000) would then equate to about $2.72 in daily interest at the beginning of your repayment term.
The next day, this $2.72 would be added to your balance and used to calculate your daily interest.
- Day 1: 0.000136 x $20,000 = $2.72
- Day 2: 0.000136 x $20,002.72 = $2.7203
- Day 3: 0.000136 x $20,005.44 = $2.7207
Calculating compound interest can be confusing — but thankfully, you don’t have to be a math expert to find out what your interest costs will look like on a loan with compounding interest.
Several online compound interest calculators are available that can help you easily figure out how compound interest can impact a loan or even a savings account.
Why do some student loans have compound interest?
While most student loans charge simple interest, some private student loans come with compound interest that could increase your overall interest costs.
Additionally, while all federal student loans come with fixed interest rates that will stay the same throughout the life of the loan, private student loans can have fixed or variable rates. A variable rate can fluctuate according to market conditions, which means you could end up paying more or less in the future.
Keep in mind: Even if you have a simple interest loan, compounding could still come into play. For example, if you’re struggling to make payments on federal student loans, you might be eligible for deferment or forbearance — two options that let you temporarily postpone your payments.
If you don’t cover the interest that accrues during this pause, the unpaid interest could be added to your principal loan balance — this is known as capitalization. This means that interest will be charged on this higher amount going forward, which will increase your overall loan cost.
How does interest work for subsidized and unsubsidized loans?
If you need to borrow for school, it’s usually best to start with federal Direct Subsidized Loans before turning to federal Direct Unsubsidized Loans and other kinds of student loans. Here’s how these federal student loans work:
- Direct Subsidized Loans are available to undergraduate students with financial need. The government covers any interest that accrues on these loans while you’re in school at least half time, during your six-month grace period after leaving school, and during any deferment periods. This can help you save money on interest over the life of the loan.
- Direct Unsubsidized Loans are available to undergraduate, graduate, and professional students, regardless of financial need. Unlike with subsidized loans, you’re responsible for all the interest that accrues on unsubsidized loans during all periods. Also keep in mind that if you don’t pay the interest that accrues on an unsubsidized loan while you’re in school, during your grace period, or during deferment periods, it will be capitalized and added to your principal loan balance.
When does student loan interest accrue?
Student loan interest begins accruing as soon as your loan is disbursed by the school — not just when you have to make payments. If you have a Direct Subsidized Loan, the government will cover this accrued interest while you’re in school.
But if you have a Direct Unsubsidized Loan or another type of student loan, it could be a good idea to at least make interest payments during deferment periods to keep this interest from capitalizing. Also remember that interest will continue to accrue during forbearance periods, and any unpaid interest will likely be capitalized afterward.
If you decide to refinance your student loans, be sure to shop around and consider as many lenders as possible to find the right loan for your needs. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
Advertiser DisclosureLoan Amounts
$1,000 up to 100% of the school-certified cost of attendance
Overview
College Ave offers a wide range of in-school loans for nearly every type of degree. There are a number of repayment options, and borrowers can choose a unique eight-year repayment term. Plus, graduate, dental, and medical students receive extended grace periods.
You may get easy funding for multiple years — 90% of undergraduates are approved for additional student loans when they apply with a cosigner. However, it can be difficult to remove a cosigner for your loan later on, as you must complete at least half of your repayment term before becoming eligible. That’s significantly longer than some lenders, which may only require one to two years of payments before releasing a cosigner.
Loan terms
5, 8, 10, or 15 years for most borrowers (law, dental, medical, and other health profession students have up to 20 years)
Loan amounts
$1,000 minimum up to your school’s annual cost of attendance; lifetime limits depend on your degree and credit profile
Cosigner release
After half of the scheduled repayment period has elapsed
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Must be a U.S. citizen or permanent resident at an eligible institution. International students with a Social Security number and a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.
Overview
Ascent offers several unique borrowing options that you don’t typically see with private lenders. In addition to traditional student loans for undergraduate, graduate, and medical programs, college juniors and seniors may qualify for its Outcomes-Based Loan — which doesn’t require established credit or a cosigner. Instead, Ascent reviews alternate factors such as your school, major, and GPA to determine your eligibility.
Ascent also offers a wide range of loan terms and repayment plans to choose from. You may even qualify for its Progressive Repayment plan, which allows you to start with small payments that gradually increase over time. Borrowers who use a cosigner can release them after as few as 12 payments, though international students don’t qualify for this option.
Loan terms
5, 7, 10, 12, 15, or 20 years
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$2,001 minimum up to your school’s annual cost of attendance; lifetime limits of $200,000 for undergrads and $400,000 for graduates
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Must be a U.S. citizen or DACA student enrolled at least half time at an eligible institution. International students with a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.
Loan Amounts
$1,000 to $99,999 annually ($180,000 aggregate limit)
Overview
Powered by Cognition Financial, Custom Choice offers student loans for undergraduate and graduate students starting at $1,000. You can borrow up to $99,999 per year with a total aggregate limit of $180,000.
If you apply with a cosigner, you may be able to release them from your loan after 36 on-time payments. You can also receive a 0.25 percentage point discount on your interest rate by setting up autopay, as well as a 2% reduction of your principal balance after graduating.
Custom Choice doesn’t charge application, origination, prepayment, or late fees. It also lets you pause payments through forbearance if you qualify for its natural disaster or unemployment protection programs.
Loan amounts
$1,000 to $99,999 per year (lifetime limit of $180,000)
Eligibility
Must be a U.S. citizen or permanent resident at an eligible institution. You must also meet Custom Choice’s underwriting criteria for income and credit, or apply with a cosigner who does. Eligible noncitizens such as DACA residents can also qualify by applying with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,000 up to 100% of school-certified cost of attendance
Overview
Sallie Mae offers the Smart Option Student Loan to undergraduate and graduate students. You can borrow up to your school-certified cost of attendance and apply just once annually to get the funds you need for the entire academic year. Plus, it may be easy to get reapproved for your future years of study — undergraduates have a 97% approval rate when they return to Sallie Mae with a cosigner.
Through Sallie Mae, you can find a variety of loans designed for specific needs, including loans for MBA programs, law school, bar study, medical school, medical residency, dental programs, dental residency, and other health profession programs. However, this lender no longer offers a career training loan.
Loan terms
10 to 15 years for Smart Option Student Loan; up to 15 years for law school and bar study loans; up to 20 years for medical school, medical residency, dental school, dental residency, and health professions loans
Loan amounts
$1,000 up to school-certified cost of attendance
Eligibility
Must be a U.S. citizen or permanent resident enrolled in an eligible program. Noncitizens may qualify by applying with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,001 up to 100% of school certified cost of attendance
Overview
INvested is an Indiana company that offers affordable student loans exclusively to state residents. Loans are available to Indiana students and parents who can meet income and credit requirements, or who have an eligible cosigner. Borrowers can borrow as little as $1,001 or as much as the school-certified cost of attendance minus other aid.
INvested provides detailed information on eligibility so borrowers can quickly determine whether to apply for a loan — however, there’s no option to prequalify with a soft credit check. Cosigner release is also available after just 12 on-time payments, considerably shorter than many other lenders.
Loan amounts
$1,001 minimum, up to the school certified cost of attendance
Eligibility
Loans are available to Indiana residents only. Borrowers must have a FICO score of 670 or higher, a 30% maximum debt-to-income ratio or minimum monthly income of $3,333, continuous employment over two years, and no major collections or defaults in recent years. Borrowers who do not meet income or credit requirements can apply with a cosigner.
Loan Amounts
$1,500 up to school’s certified cost of attendance less aid
Overview
Massachusetts Educational Financing Authority (MEFA) is a not-for-profit lender that offers low-cost undergraduate and graduate school loans to students nationwide. While only fixed-rate loans are available, interest costs may be lower than what you see with other private loans.
While you can apply with a cosigner to lock in the best rate possible, removing that cosigner later may be tough. Only one repayment plan allows cosigner release, and you must make four years of consecutive on-time payments and meet other credit and income requirements to qualify.
Loan amounts
$1,500 minimum up to school-certified cost of attendance
Eligibility
Must be a U.S. citizen or permanent resident, enrolled at least half time at a degree-granting, nonprofit institution, and must maintain satisfactory academic progress. Must have no history of default on an education loan and no history of bankruptcy or foreclosure in the past 60 months. Applicants who can’t meet the minimum credit and income requirements may apply with a cosigner.
Loan Amounts
$1,000 to $350,000 (depending on degree)
Overview
Citizens offers a variety of student loan types, including loans for undergraduates, graduate students, and parents. Perhaps the most unique feature of Citizens student loans is the option for multiyear approval. If you qualify, you can apply once and borrow for future years with a more streamlined process that only involves a soft credit inquiry.
Student borrowers can defer payments while in school and for six months after graduating. You can also score a 0.25 percentage point reduction on your interest rate for setting up autopay, as well as an additional 0.25 percentage point loyalty discount if you or your cosigner already have a qualifying account with Citizens.
Loan terms
5, 10, or 15 years for student loans; 5 or 10 years for parent loans
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$1,000 minimum, up to a maximum of $150,000 for undergraduate and graduate degrees; $250,000 for MBA and law; and $180,000 or $350,000 for health care student loans, depending on the degree type
Eligibility
Must be a U.S. citizen or permanent resident enrolled at least half-time in a degree-granting program at an eligible institution. International students can apply with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,000 up to cost of attendance
Overview
Education Loan Finance (ELFI) is a division of Tennessee-based SouthEast Bank owned by Education Loan Finance, Inc., a non-profit whose mandate is to provide access to higher education. ELFI launched in 2015 and offers undergraduate, graduate, and parent private student loans as well as student loan refinancing.
ELFI student loans and refinance loans are available to residents in all U.S. states including Puerto Rico. Borrowers can benefit from no application, origination, or prepayment fees. ELFI also offers flexible repayment terms and competitive rates, however there’s no cosigner release option and the lender doesn’t offer any discounts.
Loan amounts
$1,000 - Cost of attendance
Cosigner release
A cosigner may not be taken off a loan, but the borrower can apply for a new loan without their cosigner.
Eligibility
All 50 states as well as Washington DC and Puerto Rico.
Meet the expert:
Angela Brown
Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.
