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Department of Education to the student loan borrower) can be subsidized or unsubsidized.Ī subsidized loan has interest advantages and is available to a student (federal student loan borrower) showing financial need.Īn unsubsidized federal student loan is a student loan without the adjustments for financial need. Interest = Loan Balance x (Annual Interest Rate / Number of Days in Year) x Days in Accrual Period Subsidized and Unsubsidized LoansĪ direct student loan (a loan made by the U.S.
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To calculate the interest accrued, lenders use the following formula: Interest on student loans and parent loans (PLUS loans) is charged daily. How Interest Accrues on Student Loans and Parent Loans If the interest isn’t paid as it accrues, it can be capitalized, or added to the balance of the loan.įor example, if the loan balance starts at $10,000 and the interest due after one year is capitalized, the new loan balance becomes $10,500 ($10,000 + $500) and the interest accrued in year two is $525 ($10,500 x 0.05). So, compound interest involves charging interest on interest. How Compound Interest WorksĬompound interest is charged based on the overall loan balance, including both principal and accrued but unpaid interest (interest charged to the loan and not yet paid). Simple interest is charged based on the principal balance of a loan (the amount you originally borrowed).įor example, if the balance on a student loan is $10,000 and the annual student loan interest rate is 5%, the simple interest due after one year is $500 ($10,000 x 0.05). The interest a borrower pays may be simple or compounded. It’s typically expressed as an annual percentage of the loan balance. Interest is the amount of money due to a lender for providing funds. Use our Student Loan Calculator to determine the monthly loan payment and total payments on your student loans. This article will walk you through how student loan interest works for each type of loan and situation. Student loan interest can vary based on if your loan is a subsidized loan or unsubsidized loan, a federal loan, or a private loan. Interest is a fee charged by a lender for using borrowed money. Unfortunately, it’s not as straightforward as you might hope.īut, understanding how it works is vital to making sure you know how much you’ll have to pay back on your federal student loan or private student loan. Like almost all loans, student loans charge interest.