How To Calculate Interest on Student Loans

Student loans charge interest on your principal balance, or the amount you originally borrowed. Interest is the cost of borrowing that money and is usually calculated daily based on your loan’s interest rate and outstanding balance. The interest that accrues is added to what you owe until you make a payment, which is why understanding how student loan interest is calculated matters when estimating your total repayment. Most student loans use a simple interest formula.

Current private student loan rates

How student loan interest works

When you take out student loans, interest accrues on the loan amount. The amount that accrues depends on the interest rate, which can vary by loan type (federal or private) or degree type (undergraduate or graduate). 

“Interest rates on federal student loans are the same for all borrowers, while interest rates on private student loans may vary depending on the credit score of the borrower and cosigner, if any,” says Mark Kantrowitz, an education financing expert and author of “How To Appeal for More College Financial Aid.”

In most cases, student loan interest accrues daily. Lenders use a formula that multiplies your principal balance and interest rate, then divides by 365.25 (the number of days in a year, accounting for leap years). Unlike some other types of loans, student loans don’t compound interest in the traditional sense. 

Student loan interest calculation formula

The daily student loan interest formula is:

(Current principal balance × interest rate) ÷ 365.25 = Daily interest accrual

Here’s an example of how to calculate interest on student loans for a principal balance of $50,000 on a loan with a 7% interest rate: 

1. Convert the interest rate to a decimal: You can convert the interest rate percentage to a decimal by dividing it by 100. In this case, it would be 7/100, which equals 0.07. Once you have that, you can do the full student loan interest calculation.
2. Calculate daily interest: (50,000 × 0.07) ÷ 365.25 = $9.58 daily interest 
3. Multiply days between payments for monthly interest: Usually, you have about 30 days between payments. With this example, you’d pay $287.40 (9.58 x 30 = 287.4) per month in interest.

How interest accrues on federal vs. private student loans

Interest accrues similarly for federal student loans and private student loans. 

“Interestingly, both federal student loans and most private student loans accrue interest on a simple interest basis,” says Glenn Sanger-Hodgson, certified student loan professional (CSLP) and founder of Shonan Gold Financial LLC. 

“This means that interest accrues in a separate ‘bucket,’ so to speak, from the principal, and only ever gets added to the principal through a process called capitalization,” he explains. “When borrowers make payments, they are usually applied to any outstanding interest first, and once that’s been paid down, any remaining amount is applied to the principal.”

However, it’s important to note that some private student loan lenders may use a compound interest formula. With compound interest, interest is charged on the principal and the unpaid interest, causing it to add up fast. Contact your lender to find out how interest accrues and any capitalization rules. 

What is student loan interest capitalization?

Student loan interest capitalization is when unpaid interest is added to your principal balance. That increases your outstanding balance, and you then pay interest on that higher amount. While capitalization can still occur in certain cases, policy changes in recent years have limited how often it happens with federal student loans.

“On federal student loans, there was a push a few years ago to reduce the number of triggers for interest capitalization,” says Sanger-Hodgson. “Now interest only capitalizes after the end of a deferment on an unsubsidized loan, or if you are on the Income-Based Repayment (IBR) Plan and either no longer have a partial financial hardship or you switch to another plan.”

That is the case for Direct Loans and Federal Family Education Loan (FFEL) program loans, both managed by the Department of Education. If you have FFEL program loans that aren’t managed by the Department of Education, unpaid interest may capitalize after a grace period or deferment on an unsubsidized loan, after a forbearance, or if you leave or no longer qualify for the IBR Plan. 

Understanding compound interest on student loans

While most student loans use simple interest, some private student loan rates may involve compound interest, which works differently.

Instead of just calculating interest on your original balance, it's calculated on the total balance, including any unpaid interest from the previous day. For example, if your loan balance is $10,000 with a daily interest rate of 0.013%, you'll start by accruing $1.30 in interest. The next day, interest is calculated on $10,001.30, so you're paying interest on interest, which increases your costs over time.

Since compound interest builds off of itself, it's generally more expensive than a simple interest loan. Additionally, many private loans may have variable interest rates, which can change based on market conditions. This means your monthly interest charges may vary, depending on the rate you're being charged that month, making it harder to predict your total costs.

Check Out: What Increases Your Total Student Loan Balance?

Tips for managing student loan interest

Student loan interest can add up quickly. If you want to keep interest charges under control, consider implementing the following tips:

• Make interest payments while in school: Interest often accrues while you're still in school. If you pay off the interest as it accrues, you can prevent your overall loan balance from growing and avoid higher costs down the line.
• Make extra payments to reduce interest: When you make extra payments, you can chip away at your principal loan balance. A lower loan balance means you'll face smaller interest charges, which can add up to big savings over the course of your loan term.
• Use the debt avalanche method: If you have multiple loans with different interest rates, prioritize paying off the loan with the highest rate first. This strategy helps you reduce the most expensive debt faster, saving you money on interest.
• Refinance to get a better rate: If you have private loans with high rates, refinancing can potentially help you secure a lower interest rate and make repayment more manageable. But refinancing federal loans usually isn't recommended since you lose access to important borrower protections.

How student loan payments are applied to interest and principal

The reason it can take a while to pay off your student loans is that your payments don’t go straight to the principal. Monthly student loan payments are applied in a very specific order: They first cover any outstanding fees, then interest, and lastly, your principal balance. 

If you make extra payments, you can allocate them toward your principal balance, but you must instruct your loan servicer to do so. 

“If borrowers have extra money, they can ask that it be applied to the loan with the highest interest rate. This will save the borrower the most money over the life of the loan, by paying down the highest-cost loan first,” says Kantrowitz.

How to reduce student loan interest costs

With daily interest, student loans can be an expensive borrowing option. Here are some ways to reduce student loan interest costs. 

Pay interest while in school

For federal student loans and many private loans, you don’t need to make student loan payments while in school because payments are automatically deferred during this time. However, paying the interest that accrues in school can help you lower costs. 

“Borrowers who are not pursuing a federal public student loan forgiveness program can make interest-only payments while in school to decrease interest accumulation,” says Kelly Reddy-Heffner, a certified financial planner (CFP) at Steel City Wealth Collaborative.

Set up autopay 

You could reduce your interest rate by 0.25 percentage points by signing up for autopay. With autopay, your monthly payments are automatically deducted from your bank account. All federal student loans offer this benefit, and many private lenders offer it as well. 

Pay more than the minimum 

Once you figure out how to calculate interest on student loans, you might realize just how fast things can add up. To make a dent, strive to pay more than the minimum each month. If you get a tax refund, raise, birthday money, or other windfall, consider putting more toward your debt. 

Review your repayment options 

The student loan landscape is poised for major changes. Borrowers may want to review their repayment options, as there will be an interest benefit on a new plan. 

“Another way to reduce how much interest accrues is by enrolling in a repayment plan that features an unpaid interest subsidy,” says Sanger-Hodgson. “Currently, no active plans offer this, but the Repayment Assistance Plan, which should be available to borrowers by July 1, 2026, will include this feature. Essentially, any month where your calculated payment is less than the interest that accrued, the government will subsidize the difference, so no additional interest accrues.” 

Refinance student loans 

After you graduate and have a job, you can consider refinancing student loans to potentially reduce your interest rate if you have solid credit. Lowering your interest rate through refinancing can help reduce total interest charges. However, it’s not a good fit if you’re pursuing student loan forgiveness or are taking advantage of other federal benefits, such as income-driven repayment. Federal perks are no longer available if you refinance.