The Reality of Student Loan Interest
Understanding how student loan interest works is essential for paying it off efficiently. Unlike credit card interest, which is calculated based on your average daily balance over a month, student loan interest generally accrues daily.
How Daily Interest Accumulates
Your daily interest formula is simple: (Interest Rate / Number of Days in the Year) x Outstanding Principal Balance. This means that every single day, a small amount of interest is added to your account. When you make a payment, it covers this accumulated interest first before touching the principal balance.
What is Capitalization?
Interest capitalization is when unpaid interest is added to the principal balance of your loan. This usually happens after periods where payments aren't required, such as graduation, deferment, or forbearance. Once interest capitalizes, you start paying interest on your interest, which drastically increases the total cost of the loan.
Strategies to Save on Interest
Paying more than the minimum is the most effective way to beat compound interest. Even paying an extra $50 a month directly touches the principal balance, saving you potentially thousands over the life of the loan. Use our student loan calculator to see exactly how much time and money extra payments can save you.