Interest on Student Loans
When you borrow money, you are often charged interest by the entity that loaned you the money. When you pay back what you borrowed, your payments go toward interest and principal (the amount you borrowed). See interest rate charts for your student loans.
The date you become responsible for accrued, or accumulated, interest depends on what type of loan you have and the date it was disbursed.
| If You Have a(n): |
Disbursed: |
You Become Responsible for Interest: |
| Unsubsidized Loan |
Any time |
As soon as the loan is disbursed. |
| Subsidized Loan* |
Before July 1, 2012 |
The date your grace period expires. |
| Subsidized Loan* |
July 1, 2012 – June 30, 2014 |
When you stop attending school at least half-time.* |
* During deferment, the government pays accruing interest on subsidized loans only.
Interest Notices
You may receive an interest notice for your federal student loan(s) showing the interest accrued over a certain period of time if your loan is not subsidized and is in:
- An in-school status, which means you are enrolled at least half time.
- A grace period after you leave school but before you start making payments.
- Deferment or forbearance, where you temporarily stop making payments.
An interest notice is not a bill, but making payments for all or part of the interest can help you avoid larger loan balances later, when the interest will be capitalized (added to the principal balance). Here is an example of how paying the interest during a time when you aren’t required to make payments on your student loan can be beneficial later:
| |
Loan Amount |
Capitalized Interest for 12 months |
Principal Balance |
Monthly Payment |
Number of Payments |
Total Amount Repaid |
| When you pay interest |
$15,000 |
$0 |
$15,000 |
$184 |
120 |
$23,315* |
| When you don’t repay interest |
$15,000 |
$1,238 |
$16,238 |
$199 |
120 |
$23,900 |
|
* Total amount repaid includes $1,238 of interest paid during deferment. This example is based on an 8.25% interest rate.
When the repayment period starts, you pay $15 less per month and $585 less over the life of the loan because you paid interest as it was charged during a deferment.
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Paying Interest Early
Making interest payments before you enter repayment or when your loan(s) are in a deferment or forbearance status can:
- Minimize the amount of interest that will capitalize (be added to your principal balance) when you begin paying back your loan.
- Lower your monthly loan payments.
- Reduce the total amount you pay over the life of your loan.
Interest Capitalization
Capitalization is a process where unpaid interest is added to the principal balance of your loan. If you don’t make interest payments before beginning or resuming loan payments, the interest on your loans may be capitalized, increasing the principal balance. Each time interest is capitalized, the principal balance increases.
Calculating Interest
The calculation of interest on your student loans is based on the simple interest method. Interest accrues daily based on your current principal balance and the interest rate. Daily interest for federal student loans is calculated with the following formula:
Current principal balance x interest rate / number of days in a year = daily outstanding interest
Example: You have a balance of $10,000 at 6.80% interest.
$10,000 x 0.068 / 365 = daily outstanding interest
$10,000 x 0.068 / 365 = $1.8630
If your payment is due on the 13th of each month, and there were 30 days from your last payment, the monthly interest in this example is $55.89.
Payment Application
Your payment is first applied to the accrued interest and then to the current principal balance.
In the example above, if you made a payment of $100:
- $55.89 would pay the outstanding interest.
- $44.11 would be applied to the principal balance, reducing it to $9,955.89.
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