To make the best possible decisions about student loans, it is essential to understand how student loan interest works. Student loan interest is the amount of money added to a loan to make up for the cost of borrowing the money.
If a student takes out a $10,000 loan, they will be responsible for repaying the full $10,000 plus any interest accrued.
Interest on student loans can accrue daily, meaning that the longer a student takes to repay their loan, the more they will ultimately owe.
For this reason, it is important to try to repay student loans as quickly as possible. Some ways to do this include making larger payments when possible or refinancing to a lower interest rate.
Student loan interest can be confusing and frustrating, but understanding how it works is essential for anyone with student debt.
What is interest?: what is interest, and how does it applies to student loans
Interest is what you pay to borrow money. The interest you’ll pay depends on several factors, including the type of loan, the length of your loan, and the interest rate. With student loans, you usually don’t have to start paying back the loan until after you graduate.
The interest rate on your student loan is the percentage of the loan you will have to pay back in addition to the principal (the amount you borrowed).
For example, if you take out a $10,000 loan with a 6% interest rate, you will owe $600 in interest over the life of the loan.
There are two interest rates on student loans: fixed and variable. Fixed rates stay the same for the life of your loan, while variable rates can change periodically.
How is interest calculated?: how good is it calculated on student loans
Student loan interest is calculated based on the amount of the loan, the interest rate, and the length of time the loan is to be paid back. The lender sets the interest rate, which may be fixed or variable. The longer the repayment period, the more interest will accrue.
To calculate simple interest, multiply the daily interest rate by the number of days since you last made a payment.
This calculation gives you the unpaid interest accrued since your last payment. To get your total monthly interest charge, multiply your simple daily interest charge by 30.
How and when interest accrues on student loans
When you take out a student loan, you may not think about how interest works. But it’s important to understand how interest accrues on your loans because it can affect how much you’ll have to pay back.
Interest accrues on student loans when the money is borrowed. So, if you take out a loan for the fall semester, interest will start accruing immediately.
The amount of interest accrues on the type of loan and the interest rate. Federal student loans have fixed interest rates, so the amount of interest accrues daily is the same.
For example, if you have a federal Stafford Loan with a 4.45% interest rate and borrow $10,000, your daily interest would be $1.22.
How repayment of student loans works
Most federal student loans have a grace period of six months. This means that you don’t have to start making payments on your loan until six months after you graduate, leave school, or drop below half-time enrollment.
If you have a Direct Subsidized Loan or an Unsubsidized Direct Loan, the grace period is also the time during which the federal government pays your interest on your behalf.
The repayment period for most federal student loans is 10 years. If you can’t afford the standard 10-year repayment plan, you can choose an alternative repayment plan with a more extended repayment period.
If you have a Direct PLUS Loan or FFEL PLUS Loan, the repayment period is 20 to 25 years, depending on your chosen plan.
Conclusion
If you’re among the nearly 45 million Americans with student loans, you probably know firsthand how difficult it can be to keep up with your payments. You also may be wondering how exactly student loan interest works.
In short, when you take out a student loan, the government or private lender loans you the money for school. The amount of money you borrowed is called the principal. The interest is the extra money you must pay back on top of the principal.
How much interest you pay depends on your loan type, whether it’s a federal or private loan, and sometimes even the repayment plan you choose. But one thing is always true: The sooner you can pay off your loans, the less interest you’ll have to pay in the long run.
