Student Loan Interest & Payments

Federal student loans accrue interest based on a simple daily interest formula. This means that interest accrues (adds up) on the amount borrowed (principal loan amount), as opposed to compounding, which is when interest is added to the principal, then interest accrues on both the principal and the added interest.

Even with simple interest accrual, any interest that is not paid prior to entering repayment is capitalized (added to the principal), typically at the end of the grace period following separation from school.  Once interest is capitalized it becomes part of the new loan balance.  Capitalization increased the total cost of the loan. Visit https://studentaid.gov/understand-aid/types/loans/interest-rates to learn what other circumstances result in interest capitalization.

The formula below may be used to estimate the amount of interest that will accrue while your loan is in deferment.

Multiply the annual loan amount (the principal), by the fixed interest rate, then divide that amount by 365. 

Principal x Interest Rate / 365

Example:   $40,500 x 6.54% / 365 = $7.26 dollars/day ($2,649 over 365 days)

There are also online calculators you may use to estimate interest accrual and loan repayments based on the amount you expect to borrow, time in deferment and frequency of any interest payments you make.

In-School Loan Payments

Generally, payments are applied first to any unpaid, outstanding interest. Any remaining payment would be applied to the principal. If a payment is not enough to cover all outstanding interest, the unpaid portion of interest is carried over to be paid by the next payment.

Increases to the loan balance can be prevented by making payments that at least cover interest any time payments aren’t required, such as during in-school deferment. There are no prepayment penalties on federal student loans.