It’s easy to forget that when you’re taking out student loans, you will end up paying back more money than you initially borrowed. Your student loan interest rate determines the “price” you end up paying for your student loans over time.
Don’t worry, you don’t need to be a math whiz to calculate your student loan interest rate. Instead, grab a calculator and a pen and follow the steps below to learn how to calculate interest rates on a student loan.
As an example, using said calculator and pen, let’s say you have $20,000 worth of federal student loans with a 7% interest rate, and are paying it off using a standard, 10-year repayment plan.
In order to calculate our student loan interest, we are first going to figure out how much interest we are accruing every day and use that to determine how much interest we accrue in a month or a year.
Step 1: Daily Interest
First, determine how much interest you are accruing every day. That’s right, every day when you wake up, your student loan is accruing a little more interest. This is sometimes referred to as your interest rate factor.
In order to figure out your interest rate factor, you convert your interest rate into a decimal, and then divide your interest rate by the number of days in a year. In our example, it looks like this:
.07 / 365 = .00019 or .019%
Step 2: Daily Costs
So, you know that you are accruing .019% of your loan in interest every day, but that number might not mean much to you. What we really want to know is how much money you owe every day that your loan is outstanding.
In order to determine the actual dollar amount of interest you are charged every day, you multiply the amount you have left to pay on your loan by your daily interest rate from above. So using our example numbers, the math looks like this:
$20,000 x .00019 = 3.8 or $3.80 per day
This means that every day that you continue to owe $20,000 on a loan with a 7% interest rate, you accrue $3.80 in interest, which is added to the principal amount you owe. In other words, it costs you about $3.80 per day in order to have your $20,000 loan still outstanding.
Step Three: Monthly Costs
Once you know how much you’re paying in interest every day, you can determine how much you’re paying in interest every month. In order to figure out how much cash you’re shelling out monthly to pay your accruing interest, you multiply your daily interest cost by the amount of days between payments, which is usually 30 days, or one month. Here it is with our example numbers from above:
$3.80 x 30 = $114
That $114 is how much debt you are accruing each month in interest charges, and that can add up quick! Remember, interest charges aren’t part of the original amount you borrowed, interest is a new cost incurred as a result of not having fully paid off the loan. That means that, in our example, it’s costing $114 a month just to have a loan.
Understanding Compound Interest
Once you know how to calculate student loan interest, it is important to understand how that interest compounds. In general, student loan interest accrues daily (that’s the $3.80 daily charge we discussed above), but it doesn’t compound daily.
What’s the difference between interest compounding and interest accruing?
Compounding is what happens when the interest you owe becomes part of your underlying loan and you get charged interest on that interest. Paying interest on interest can make your student loans actually increase, even if you’re making payments on the loans.
Often you’ll pay off that accrued interest each month, but if you don’t cover it all, unpaid interest will compound—essentially becoming part of your principal debt and accruing its own interest.
Your interest may also compound on federal loans after your grace period ends, or after you take a forbearance on a loan.
Depending on the terms of your loan, you may be able to avoid compounding some of the interest by paying at least the full cost of the interest your loan accrues every month.
Lowering Your Student Loan Interest Rate
If thinking about your daily interest is giving you the heebie-jeebies, student loan refinancing may help you decrease your interest rate. Lowering your interest rate can lead to paying less in interest over the life of your loan (if you don’t extend your term).
Let’s go back to our example from above. If you have a $20,000 loan with a 7% interest rate, you’re accruing $3.80 in interest costs per day. If you have a $20,000 loan with a 5% interest rate, however, you would accrue only $2.74 per day. While the difference between $3.80 and $2.80 might not seem like much, you can really see the savings when you look at how interest accrues monthly.
A $20,000 loan with a 7% interest rate might accrue $114 in interest every month. A $20,000 loan with a 5% interest rate, however, might only accrue $82 in interest every month. Over a year, that could add up to $384 in savings. Yup, an interest rate that is only lower by a percent or two can save you serious cash over the life of your loan.
So how does student loan refinancing actually work? When you refinance your student loans, a lender offers you a new private loan to replace your existing student loans.
Your new refinanced loan will hopefully offer you a better interest rate than the current rate on your student loans. Learning how to calculate student loan interest can help you see exactly how much you might save by securing a lower interest rate on your student loans by refinancing.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.