How to Calculate Student Loan Interest

Student loans may be necessary if you don’t have other funding options to pay for school. Knowing how to calculate student loan interest is important for understanding what you’ll pay to borrow and how much of your payment goes to interest each month.

Federal student loan interest rates are set by Congress and are fixed, meaning they don’t change over the life of the loan. Private student loan rates are determined by lenders and may be fixed or variable. Here’s a closer look at how student loan interest calculations work.

How is student loan interest calculated? 

Most student loans use simple interest, which calculates interest based on your original borrowed amount. Some private student loans might use a compound interest formula, where the interest is calculated based on the principal and interest. 

Here’s what the formula for calculating simple interest looks like:

Simple interest = Principal x Rate x Loan term

Compound interest calculations are a little more complicated. When lenders compound interest, they charge interest on your interest. Here’s what that formula looks like:

Compound interest = Principal [(1 + i)ⁿ – Principal]

In this formula, i is the interest rate while n is the number of compounding periods per year. The lender can decide how often interest compounds. 

Between simple interest and compound interest, simple interest is better for student loan borrowers. It’s easier to calculate and requires only interest on the original amount borrowed. 

How to calculate interest on your student loans 

Assuming your student loans use simple interest, it’s easy to calculate how much interest you’ll pay. You just need to know your:

• Interest rate
• Principal balance
• Loan term

You should be able to find this information on your most recent loan statement. If you have federal student loans, you can log in to your StudentAid account to view the specifics of each loan. 

Once you know the numbers, you’re ready to calculate the interest on a student loan. 

Convert your rate to a decimal

First, you’ll need to convert your loan rate to a decimal. You can do that by dividing it by 100. 

For example, let’s say you have a federal undergraduate loan with a rate of 5.50%. Divide 5.50 by 100, and you get 0.055.

Multiply the variables

Once you’ve converted your percentage rate to a decimal, you just need to do one more simple calculation: Multiply the loan principal by the rate by the term to get your simple interest total. 

Here, we’ll assume you have $30,000 in loans with a 10-year repayment term. The calculation is as follows:

$30,000 x 0.055 x 10 = $16,500

Is this actually what you’ll pay in interest? Not quite. 

Interpret the results

At first glance, $16,500 seems like a significant amount of interest to pay for a student loan—and it is. But remember: As you make payments toward your loans, the principal goes down. The new principal number is what you’d use to recalculate the remaining interest on your loan. 

An online student loan repayment calculator can help you understand how the interest adds up. For example, when you plug in the same numbers, you find that the total interest you might pay on your $30,000 in loans comes to $9,069, not $16,500. 

That might feel like a less daunting number. 

How to calculate student loan interest per month

Knowing how much you pay in interest to your loans monthly may be important if you plan to change your repayment strategy. You can calculate monthly interest on student loans if you know your:

• Interest rate
• Loan balance
• Number of days since your last payment

Here’s how to find your monthly interest paid. 

Calculate your daily interest rate

You’ll start by calculating your daily interest rate, also known as the interest rate factor. To do that, you’ll divide your student loan interest rate by the number of days in the year. 

For this example, we’ll once again use the current federal undergraduate loan rate of 5.50%. 

Here’s the calculation:

0.055 / 365 = 0.00015 (0.15%)

Multiply the daily rate by your loan balance

Next, you’ll need to figure out how much interest you pay daily on your loans. Here, you’ll multiply your daily interest rate by your balance. We’ll assume you owe $30,000 in federal student loans. 

The math looks like this:

$30,000 x 0.00015 = $4.50

Find your monthly interest total

The final step is multiplying your daily interest paid by the number of days since your last payment. We’ll assume your loans have a 30-day billing cycle. 

Here’s the calculation:

$4.50 x 30 = $135

This is the amount of interest you paid to your loans for the month. As your principal balance goes down, your monthly interest paid also decreases. Note that for most simple interest loans, interest accrues daily. 

Calculate how much of your payment goes to interest

To find out how much of your payment goes to interest each month, complete the above calculations and subtract the interest from your monthly payment amount. 

Once again, assume you have $30,000 in loans at 5.5% with a 10-year repayment term. If your monthly payment is $326, $135 of that would go to interest the first month, with $191 going to the principal. 

You’d recalculate monthly interest the next month based on your new loan balance. You’d then subtract the interest amount from your payment to see how much goes to interest versus principal. As time goes on, a larger share of your monthly payment goes to the principal instead of the interest. 

Calculating fixed vs. variable student loan interest

All the previous calculations have assumed a fixed interest rate. But how do you calculate student loan interest when the rate is variable? 

That’s more difficult because the rate may go up or down over time. Lenders may adjust variable rates for private student loans when the Federal Reserve raises or lowers the federal funds rate. This is the rate at which banks lend to one another overnight. 

Here’s what can happen to your interest calculations if the rate changes on a variable-rate private loan.

• If the rate goes up, your total interest cost increases, and so might your payments. 
• You’ll pay less interest if the rate goes down, and your payment might drop. 

Your lender should notify you that a rate change is pending. If your student loan rate is set to rise, you might consider refinancing into a new private student loan with a fixed rate. 

Refinancing to a fixed-rate loan can help you avoid future rate hikes and make calculating your total interest and monthly payments easier. 

How can you minimize the student loan interest you pay? 

Reducing what you pay in interest on student loans can save you money, and you might have a few options to do it. Here are several of the best ways to pay less interest on your loans. 

• Refinance. As we mentioned, refinancing could help you get a lower interest rate or move from a variable to a fixed rate, both of which could save money on interest. 
• Enroll in autopay. Many lenders offer an autopay discount, which can reduce your rate by 0.25% or more when you sign up for automatic payments.
• Ask about other discounts. It’s also worth asking about any other discounts a lender may offer, such as a rate cut for on-time payments or loyalty discounts for being a good customer. 
• Get a cosigner. If you know someone with a strong credit score, having them cosign your student loans could help you get a lower rate. Be sure to ask the lender about cosigner release if the cosigner doesn’t want to remain on the loan long-term. 
• Pay weekly or biweekly. Paying more often can chip away at your principal balance, reducing the amount on which interest is calculated. 
• Pay a lump sum. If you have extra cash or receive a windfall, you might use it to pay down a chunk of your student loan debt. Every dollar you can trim is less money you’ll pay interest on.