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 different kinds of student loans, the exact point where your loans begin to collect interest may vary. Let’s look at some common loan types and see how interest terms vary among them.

Different Loan Types & Varying Interest Rates

Subsidized Loans

Student loans from the federal government are either subsidized or unsubsidized. A “subsidized” loan means that the government makes interest payments on that loan while you’re still 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.

So, when do subsidized loans start accruing interest? From the moment that you take out a subsidized loan to the moment that your grace period ends, the amount you owe will remain unchanged. After that, however, you’ll become responsible for the interest that accrues on the loan at the agreed-upon rate.

Unsubsidized Loans

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.

Private Student Loans

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

Extra Payments

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, as it will help you pay less money overall.

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’ll 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 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.

What Factors Affect Student Loan Interest Rates?

• Personal Credit History: Usually the most profound influence on your student loan interest rates is your individual credit history and financial profile. Fortunately, that also happens to be the easiest interest rate-impacting factor for you to exert personal control over as a borrower. As your credit score and track record becomes stronger, lenders will be more motivated to win your business, and to do so they may offer you lower, more alluring rates and terms.

Credit history can also work against you if your finances become unmanageable and you have trouble paying bills on time. That is why it is so vital that you take steps to raise your credit score, earn and save as much money as possible, and pay all of your debts and loan obligations on time. Do those things and your credit should steadily improve.

• Industry Shifts: The rates charged on all consumer loans are tied to underlying interest rates that are set by the government or by the dynamics of supply and demand in the marketplace. If the Federal Reserve Bank, for instance, cuts the rates it charges to lend cash to financial institutions, then through a “trickle-down effect” the price those lenders charge to consumers will typically drop in tandem. If the Fed raises rates, usually consumer rates will eventually go up.

For that reason, these broader financial industry actions can have a significant impact on student loan rates. Tracking the sources and movements of major underlying rates can be complicated, but is not at all necessary in order for you to shop for an affordable student loan, refinance, or consolidation rate. Just compare loan rates from reputable lenders, who will automatically raise or lower their specific rates in order to stay competitive as the financial markets shift through the natural ups and downs of interest rate fluctuations.

• Fixed vs. Variable student loan rates: Loans can be either fixed or variable, and if a loan carries a fixed interest rate then that rate will remain the same throughout the entire lifetime of the loan repayment process. If you take out a student loan that charges a fixed rate of 4%, for instance, then that rate will remain intact for as long as you have the loan – as long as you don’t trigger a rate change by violating the terms and conditions of the loan.

With a variable rate, by contrast, the rate may vary. Your interest rate can go up, come down, or remain the same – depending upon prevailing interest rates. The rate may rise if economic conditions send interest rates higher, for example, or it may fall – which would make your loan less expensive – if prevailing conditions send rates lower. Because of the inherent potential of variable rates to change, you should check to see if the loan has caps or limits placed on high the rate can go during any given timeframe. But these kinds of loans can also potentially work in your favor to trigger lower monthly payments. That’s because if interest rates fall you’ll capture more savings – whereas with a fixed rate loan even if rates plummet the rate you pay will remain exactly the same.

• Discounted Interest Rates: Lenders sometimes also offer discounted interest rates on loans, and they may advertise these using terminology such as “reduced basis points.” Essentially these are marketing incentives offered to borrowers that provide them with especially low, attractive rates on student loans or student loan consolidation and refinancing. Why would a lender extend that kind of perk to a customer? Typically these incentives are offered to borrowers who have their monthly payments automatically withdrawn from their bank accounts each month.
That ensures that the lender gets paid on time, as long as you keep sufficient funds in your bank account. In exchange for that reassurance, many lenders will agree to give you an interest rate discount. Since the amount of interest you pay has a direct impact upon the size of your monthly payment, these incentives are another factor that can affect your student loan interest rate.

• Refinancing: 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. Therefore, 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 can equip yourself with the tools necessary to pay less interest. By making extra payments or by refinancing your loans, you can assure that you’re not paying more than required.


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