How Does Student Loan Interest Work?


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How Student Loan Interest Works

The basics of student loans are pretty straightforward. A lender (usually the federal government) gives you a certain amount of money to help pay for college. Once you’ve graduated and you start your career, you pay that money back. However, student loans, like most other loans, generate interest on top of what was borrowed.

Because of interest, you should always expect to pay back a more than your original student loan amount. To understand how special terms affect student loan interest and how you can pay as little interest as possible, let’s take a closer look.

When Do Student Loans Start Accruing Interest?

Personal loans often begin to accrue interest immediately after they are taken out. However, student loans are unique in many ways and the standard rules don’t always apply to them. Since there are several different kinds of student loans, the exact point at which your loans begin to collect interest may vary. Let’s look at some common loan types and see how interest terms vary among them.

When Do Subsidized Loans Start Accruing Interest?

Student loans from the federal government are either subsidized or unsubsidized. What it means for a loan to be “subsidized” is that the government will make interest payments on that loan while you’re in school. Technically subsidized loans start to accrue interest the moment you take them out. However, since the government is paying that interest while you’re in school, you don’t have worry about paying a dime of it until after you graduate.

From the moment that you take out a subsidized loan to the moment that your grace period ends after graduation, the amount you owe will remain completely unchanged. After that, however, you’ll become responsible for the interest that accrues on the loan at the agreed-upon rate.

When Do Unsubsidized Loans Start Accruing Interest?

Unsubsidized loans don’t enjoy the same government support as their subsidized counterparts. For that reason, interest begins to accrue immediately after you receive the loan and you are the one responsible for that interest from the beginning. You won’t have to pay anything until after graduation, but when you get your first student loan bill, you should expect the overall amount to be higher than what you originally borrowed.

When Do Private Loans Start Accruing Interest?

Private student loans come from private lenders, so they don’t get any government support. Often, your private student loans will begin to accrue interest the moment they are taken out and, depending on the terms of your loan repayment plan, you may be responsible for paying that interest while you’re still in school. This is not necessarily a bad thing as it is a way to build credit while in school. It’s also important to remember that the interest rate on your private student loan can change with a number of factors.

How Is Student Loan Interest Calculated?

Once you start making payments, the lender will calculate interest on a monthly basis and add it to your loan amount. Since interest is accrued continuously rather than in a single lump sum, student loans have compound interest. Here’s a formula that allows you to calculate your student loan interest at home:

    • Let P stand for the outstanding balance on your loan, or the total amount that you have left to pay back.
    • Let D stand for the number of days since your last payment.
    • Now take your loan’s interest rate and turn that into a decimal (so 6% would become 0.06). Divide that decimal by 365. That will give us R.
    • Now multiply these like this:


    • P × D × R


The result will be the amount of interest added to your student loan balance that month. So, for example, if you had an outstanding student loan balance of $40,000 and an interest rate of 6%, here’s how you would calculate the interest compounded on your loan over 30 days.

  • $40,000 × 30 × (0.06 ÷ 365) = $197.26

How Do Extra Payments Affect Student Loan Interest?

Not everyone makes student loan payments on a monthly basis alone. Instead, one way to pay your student loans back quickly is to make additional payments on your student loan balance whenever you have the extra money.

This is a great strategy if you have the funds. Not only will it help you to pay back your loans in a more timely manner, but it will also help you pay less money overall. This is because extra payments decrease the overall amount of interest that you owe. Think about it like this: if you don’t make extra payments, then it will take you 20 years to pay back your loan. On the other hand, if you do make the extra payments, then it might just take you 15 years. With the extra payments, you’re avoiding about five years of payments!

Even if you can’t pay off the entire amount of your student loans, extra payments can still help to lower your interest rate. Remember that interest is calculated by taking your total outstanding balance into account. Anything that makes this balance lower — such as sending your student loan refund back — will also help you to accrue less interest.

How Does Refinancing Change Student Loan Interest?

Making extra payments isn’t the only way to lower the amount of interest that you pay on your student loans. When you first received your loans, you agreed to a particular fixed interest rate determined by the government or your private lender. The interest rate for those loans is set in stone, but there’s a way around it.

Student loan refinancing is a process where you take out a brand new loan to pay back the loan or loans that you currently owe. This new loan comes with a different interest rate, terms, and options compared to your old loan, so you can negotiate for a lower interest rate altogether.

Ultimately, the goal of student loan refinancing is to get a lower interest rate on your student loans. With a lower interest rate, you may end up paying less, helping you to cut down on the final amount that you owe for your student loans.

Student loan interest rates may appear complicated at the outset. By learning how student loan interest rates work, you are able to equip yourself with the tools necessary to pay less interest in the long run. By making extra payments when you have the money or by refinancing your student loans, you can make sure that you’re not paying any more than you have to.