Note that the situation for student loans has changed due to the impact of the coronavirus outbreak and relief efforts from the government, student loan lenders and others. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.
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Back when you signed on the dotted line and took out your student loans, how well did you understand the terms?
But now that you’re wondering how much you’ll have to pay back on your loans, you’re likely asking yourself: How does student loan interest work?
Understanding how student loan interest works is an important step in managing your debt. To do so, let’s answer the following questions:
- How does student loan interest work?
- How is student loan interest calculated?
- How is student loan interest applied?
- What happens if you don’t make full payments each month?
- How are extra student loan payments treated?
- What does student loan interest mean to me?
Maybe things were a little fuzzy, but you knew you needed the loans to pay for college. Or maybe you’re a parent who wanted to help your child pay for an education and a better future.
Still, whether you paid for your education or helped your child, interest rates are one of the more complicated aspects of student loans. How interest rates are set, how interest accrues and how payments are divided between your principal balance and interest charges can be difficult to grasp — we’ll take you through the ins and outs of student loan interest.
When new student loans are issued, the borrower signs a promissory note that explains the terms of the loan. Every part of this document is important to read and understand, as it determines how much you owe and when your payments are due. This applies to parent PLUS loans and their interest as well.
The most important terms to look out for are:
- Disbursement date: The date the funds arrive and interest starts accruing
- Amount borrowed: The total amount borrowed in each loan
- Interest rate: How much you have to pay to borrow the funds
- How interest accrues: Whether interest is charged daily or monthly
- How interest capitalizes: When accrued interest is capitalized (or added) to your principal balance
- First payment date: When you have to make your first loan payment
- Payment schedule: How many payments you have to make
Lenders understand that most full-time students do not have an income, and if they do, it is not enough to cover payments while in school. As a result, it’s often possible to avoid making payments while you’re in school.
When does interest start on student loans?
For students that demonstrate need, the government offers subsidized direct loans. If you qualify, the government pays your interest while you’re in school, so your balance doesn’t grow. Once you graduate, though, the interest becomes your responsibility.
Unsubsidized loans, meanwhile, charge interest from the day the loan is disbursed. Since you aren’t required to make payments, interest will build up, and you’ll graduate with a loan balance higher than you started with.
Do parent PLUS loans accrue interest the same way? Unfortunately, there are no subsidized loans for parents. Additionally, regular repayment begins after the loan is completely disbursed (unless you request a deferment).
Your required loan payment will be the same each month. However, when you make a payment, interest is paid before any money goes toward reducing your principal. The remainder of your payment is applied to your principal balance.
Your interest rate is divided by the number of days in the year to get your “interest rate factor.” The interest rate factor is then multiplied by your loan balance and then multiplied by the number of days since your last payment. The result is how much interest you’re charged for that period.
|What about fixed and variable interest rates?|
|● Federal loans: The Department of Education only applies fixed interest rates, and the rates are set by Congress annually. Fixed rates remain the same over time, unless you refinance your federal loans to an, ideally, lower rate.
● Private loans: Lenders typically offer fixed or variable interest rates, and variable rates are fluid over time, making them a riskier proposition for borrowers. Some online lenders even offer hybrid rates, which offer both fixed and variable rates.
As you make payments on your student loan, your balance and the amount of interest you accrue will drop. With lower interest charges, more of your payments are applied to your principal.
Over the life of your loan, your interest paid will decline each month, which accelerates your principal payment. That’s how it works with student loan amortization — basically a fancy way of saying “paying down principal on a loan.”
Remember, your payment amount goes toward interest and any outstanding fees before it reduces your principal.
If you have an unsubsidized loan or are past the subsidy period, your loan payoff date requires you to make the same minimum payment each month. If you’re on a payment plan or have deferred payments, interest continues to accrue. This amount is added to your principal, increasing your student loan balance.
If you’re able, it can make sense to pay at least the interest each month. If you don’t, your loan balance will continue to grow, and you will owe interest on the interest you didn’t pay in previous months.
In fact, if you have the ability, making interest payments while you’re in school can save you money in the long run.
The difference is even more pronounced when you think of interest paid on a parent PLUS loan. Let’s say you take $5,000 in parent PLUS loans each year your child is in school. Here’s how the interest builds up with a 7% interest rate:
These calculations were made using Sallie Mae’s accrued interest calculator and assumes the current federal rate on parent PLUS loans will hold for four years. It also assumes you will keep accruing interest for four years on your child’s freshman year loan, three years on the sophomore loan, two years for the junior year, and 12 months on the final loan.
As you can see, you borrowed $20,000, but if you put off repayment until after your child graduates from college, your loan balance will grow to $23,500.
It’s important to remember that making partial payments will count as a missed or late payment on your credit report and may cause you to go into loan default.
If you’re struggling to make payments and can’t figure out a way to afford them, you can look into an income-driven repayment plan. The REPAYE program, for example, limits your payments to just 10% of your discretionary income.
Using our Income-Based Repayment calculator, you can see how IBR can help with your monthly cash flow. However, you have to watch out: Interest remains a factor, and the longer you’re subject to interest charges, the more you repay in the end.
|First month’s payment||$328||$149||$179|
|Last month’s payment||$328||$0||$328|
|Total balance paid||$36,080||$43,591||$7,511|
|Repayment term||-9.2yr||– 25yr||-15.8yr|
The example above assumes you have an adjusted gross income of $30,000, that your income rises 3.5% each year, and that you have $30,000 in federal student loan debt at an average interest rate of 4.26%.
And what happens if you defer your student loan payments? Consider your parent PLUS loans. Our student loan deferment calculator can help you figure out how much extra you pay if, for example, you have $20,000 in debt at 7% and defer for 12 months.
As you can see, deferment adds $1,400 to the total when you’re on a 10-year repayment.
While it’s possible to defer payments when you have a parent PLUS loan, the fees and interest might mean it makes more sense to avoid it if you can make room in your budget to keep paying down your debt, or even looking into student loan refinancing at a lower interest rate, if possible.
When you make your monthly payment, you’re given the option to pay extra. If you do, that extra payment is applied directly to the principal, which will reduce your interest in the future.
Any other extra payments made throughout the month are treated as normal payments. That is, your payment is first applied to interest you accrued since your last payment and then your principal. Double-check your lender’s payment policies to make sure any extra payments are really going to pay down your principal.
Don’t underestimate the power of early student loan payments. Paying an extra $50 or $100 each month can save you thousands of dollars in interest, depending on your loan terms. Check out the student loan prepayment calculator to see how much you can save by paying a little more every month.
Putting off payments or just making the minimum each month will leave you with a big interest cost over the life of your loan.
Use your new knowledge of how to calculate student loan interest on a loan and how compound interest works to pay off your loans early.
You work hard for each paycheck. Pay more today so you can save even more later.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.87% – 6.15%1||Undergrad & Graduate|
|1.88% – 5.64%2||Undergrad & Graduate|
|2.50% – 6.85%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|1.74% – 6.59%5||Undergrad & Graduate|
|1.90% – 5.25%6||Undergrad & Graduate|
|1.88% – 5.64%7||Undergrad & Graduate|
|1.86% – 6.01%||Undergrad |
|2.13% – 5.25%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Interest Rate Disclosure
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.44% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.
Auto Pay Discount Disclosure
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Student Loan Refinancing Loan Cost Examples
These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.
One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.
© 2021 Earnest LLC. All rights reserved.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for SoFi.
Fixed rates range from 2.49% APR to 6.94% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 6.59% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 11/15/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.
7 Important Disclosures for Navient.
8 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.