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If you’re repaying a variety of different debts to different lenders, keeping track of them and making payments on time each month can be time consuming. It isn’t just tough to keep track of these various debts, it’s also difficult to know which debts to prioritize in order to fast track your debt repayment. After all, each of your cards or loans likely have different interest rates, minimum payments, payment due dates, and loan terms.

Consolidating — or combining — your debts into a new, single loan may give your brain and your budget some breathing room. We’ll take a look at what it means to consolidate debt and how it works.

What Is Debt Consolidation?

Debt consolidation involves taking out one loan or line of credit (ideally with a lower interest rate) and using it to pay off other debts — whether that’s car loans, credit card debt, or another type of debt. After consolidating those existing loans into one loan, you have just one monthly payment and one interest rate.


💡 Quick Tip: Credit card interest rates average 20%-25%, versus 12% for a personal loan. And with loan repayment terms of 2 to 7 years, you’ll pay down your debt faster. With a SoFi personal loan for credit card debt, who needs credit card rate caps?

Common Ways to Consolidate Debt

Your options to consolidate debt depend on your overall financial situation and what type of debt you wish to consolidate. Here are some common approaches.

Balance Transfer

If you are able to qualify for a credit card that has a lower annual percentage rate (APR) than your current cards, a balance transfer credit card may be one option to consider and can be a smart financial strategy to consolidate debt if you use it responsibly.

Some credit cards have zero- or low-interest promotional rates specifically for balance transfers. Promotional rates are typically for a limited time, so if you pay the transferred balance in full before it ends, you’ll reap the benefit of paying less — or possibly zero — interest.

However, there are some caveats to keep in mind. Credit card issuers generally charge a balance transfer fee, sometimes 3% to 5% of the amount transferred. If you use the credit card for new purchases, the card’s purchase APR, not the promotional rate, will apply to those purchases.

At the end of the promotional period, the card’s APR will revert to its regular rate. If a balance remains at that time, it will be subject to the new, regular rate.

Making late payments or missing payments entirely will typically trigger a penalty rate, which will apply to both the balance transfer amount and regular purchases made with the credit card.

Home Equity Loan

If you own a home and have equity in it, you might consider a home equity loan for consolidating debt. Home equity is the home’s value minus the amount remaining on your mortgage. If your home is worth $300,000 and you owe $125,000 on the mortgage, you have $175,000 worth of equity in your home.

Another key term lenders use in home equity loan determinations is loan-to-value (LTV) ratio. Typically expressed as a percentage, the LTV is similar to equity, but on the other side of the scale: Instead of how much you own, it’s how much you owe. The percentage is calculated by dividing the home’s appraised value by the remaining mortgage balance.

Lenders typically like to see applicants whose LTV is no more than 80%. In the above example, the LTV would be 42%.

If you qualify for a home equity loan, you’ll typically be able to tap into 75% to 80% of your equity.

After the home equity loan closes, you’ll receive the loan proceeds in one lump sum, which you can use to pay your other debts.

A home equity loan is essentially a second mortgage, a secured loan using your home as collateral. Since there is a risk of losing your home if you default on the loan, this option should be considered carefully.

Personal Loan

If you don’t have home equity to tap into or you prefer not to put your home up as collateral, a personal loan may be another option to consider.

There are many types of personal loans, but they are typically unsecured loans, which means no collateral is required to secure the loan. They can have fixed or variable interest rates, but it’s fairly easy to find a lender that offers fixed-rate personal loans.

Generally, personal loans offer lower interest rates than credit cards. So consolidating credit card debt with a fixed-rate personal loan may result in savings over the life of the loan. Also, since personal loans are installment loans, there is a payment end date, unlike the revolving nature of credit cards.

There are many online personal loan lenders and the application process tends to be fairly simple. You may be able to use a loan comparison site to see what types of interest rates and loan terms you may be able to qualify for.

When you apply for a personal loan, the lender will do a hard credit inquiry into your credit report, which may temporarily lower your credit score. The lower credit score may drop off your credit report in a few months.

If you’re approved, the lender will send you the loan proceeds in one lump sum, which you can use to pay off your other debts. You’ll then be responsible for paying the monthly personal loan payment.

A drawback to using a personal loan for debt consolidation is that some lenders may charge origination fees, which can add to the total balance you’ll have to repay. Other fees may also be charged, such as late fees or prepayment penalties. It’s important to make sure you’re aware of any fees or penalties before signing the loan agreement.


💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.

Is Debt Consolidation Right For You?

Your financial situation is unique to you, but there are several things you’ll want to keep in mind when trying to decide if debt consolidation is right for you.

Debt Consolidation Might Be a Good Idea If …

•   You want to have only one monthly debt payment. It can be a challenge to manage multiple lenders, interest rates, and due dates.

•   You want to have a payment end date. Using a home equity loan or a personal loan for debt consolidation will be useful for this reason because they are forms of installment debt.

•   You can qualify for a zero interest or low-interest rate balance transfer credit card. This may allow you to consolidate multiple debts on one new credit card and save interest by paying off the balance before the promotional rate ends.

Debt Consolidation Might Not Be For You If …

•   You think you’ll be tempted to continue using the credit cards you paid off in the debt consolidation process. This can leave you further in debt.

•   You’ll incur fees (e.g., balance transfer fee or origination fee). If the fees are high, it might not make sense financially to consolidate the debts.

•   Consolidating your debts may actually cost you more in the long run. If your goal is to have smaller monthly payments, that generally means you’ll be making payments for a longer period of time and incurring more interest over the life of the loan.

Recommended: Getting Out of Debt with No Money Saved

Credit Card Debt Relief: How to Get It

Some people seek assistance with getting relief from debt burdens. Reputable credit counselors do exist, but there are also many programs that scam people who may already be overwhelmed and are vulnerable.

Disreputable debt settlement companies may charge fees before ever settling your debt and often make bogus claims, such as guaranteeing that they will be able to make your debt go away or that there is a government program to bail out those in credit card debt.

Even if a debt settlement company can eventually settle your debt, there may be negative consequences to your credit along the way. What’s more, a debt settlement program may require that you stop making payments to your creditors. But your debts may continue to accrue interest and fees, putting you further in debt. The lack of payments may also take a negative toll on your payment history, which is an important factor in the calculation of your credit score.

Recommended: Debt Settlement vs Credit Counseling: What’s the Difference?

Debt Relief: Is it a Good Idea?

What’s a good idea for some people may be a bad idea for others. Whether debt relief is a good idea for you and your financial situation will depend on factors that are unique to you. Working with a reputable credit counselor may be a good way to get some assistance that will help you get out of debt for good and create a solid financial plan for the future.

The Takeaway

Debt consolidation allows borrowers to combine a variety of debts, like credit cards, into a new loan. Ideally, this new loan has a lower interest rate or more favorable terms to help streamline the repayment process.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Student loan interest is what you pay your lender as a cost of borrowing money for your education. The interest you’re charged is a percentage of your original loan amount, or the principal of your loan.

If you’re not sure what your student loan interest rate is, you can find it on your loan agreement. There, it’s listed as an annual rate. But because you pay interest monthly when you make your loan payments, you may be wondering whether student loan interest is monthly or yearly.

The answer is: The interest rate is yearly, but interest is added to your loan balance monthly.

It’s a little confusing, but we’re here to help. Understanding how interest is calculated, and learning ways to help minimize the amount you pay, could help you reduce your student loan debt.

How Student Loan Interest Works

Student loan interest begins to accrue on private student loans and many types of federal loans as soon as the loans are issued. The interest generally accrues daily, and the total accrued amount is calculated and added to the loan balance monthly. That means your loan balance, and the amount of interest you pay, can grow over time.

Daily Interest

Most federal loans use a simple daily interest formula. You accrue one day’s worth of interest for each day you owe money.

The daily interest rate is calculated by dividing your loan’s annual interest rate by 365 (for the number of days in the year). For example, let’s say you borrow $10,000 in student loans at an annual interest rate of 6.00%. Your daily interest rate is .00016 (or 0.06 / 365). Next, to figure out how much you are charged in interest each day, multiply your daily interest rate by your student loan balance (.00016 x 10,000) to get the answer: $1.60 a day.

Monthly Payment

As noted above, student loan interest accrues daily but it’s typically added to your loan balance every month. When you make a student loan payment, most of that payment goes toward interest and the rest goes toward your principal balance.

Any unpaid student loan interest will be added to the amount you owe. In some cases, the unpaid interest can capitalize, meaning that it’s added to your principal balance, increasing the principal amount. The interest is then calculated on the new higher principal balance, increasing the cost of your loan.

Another factor that affects your monthly student loan payments is whether the loans have fixed or variable interest rates. Fixed rates stay the same throughout your loan term. Variable interest rates can change over time, which can change the monthly amount you owe. All federal student loans have fixed interest rates; private student loans may have fixed or variable rates.

Annual Rates

Annual interest rates on student loans vary by loan type. The rates on federal student loans are set by Congress and determined by formulas specified in the Higher Education Act of 1965.

These are the federal student loan interest rates for federal loans disbursed on or after July 1, 2025 and before July 1, 2026:

•   Direct Subsidized and Direct Unsubsidized loans for undergraduate students: 6.39%

•   Direct Unsubsidized loans for graduate or professional students: 7.94%

•   Direct PLUS loans for parents and graduate or professional students: 8.94%

Private student loan rates vary by lender. The average student loan interest rates for private loans in December 2025 ranges from 3.18% to 13.99% or more. The actual rate an individual borrower may get is based on factors such as their financial profile, including their credit history.

Recommended: 3 Factors That Affect Student Loan Interest Rates

How Student Loan Interest Is Calculated

The student loan interest rate is based on a formula that consists of multiplying the outstanding principal loan balance by the number of days since the borrower made their last payment, and multiplying that by the daily interest rate.

Keep reading to learn more about the annual percentage rate (APR) of student loans, the daily interest formula, and when interest accrues.

Annual Percentage Rate (APR)

There is a difference between student loan APR vs. interest rate. The APR is the total cost of the loan per year. It includes the interest rate plus any fees, such as an origination fee, which is the cost of processing the loan. For that reason, a loan’s APR may be higher than its interest rate. The APR gives a borrower a more realistic look at what the overall cost of a student loan will be.

It’s important to be aware that federal student loans publish interest rates — not APRs — so the published interest rate doesn’t reflect the full cost of the loan. There is an origination fee of 1.057% for all Direct Subsidized and Unsubsidized federal student loans and a fee of 4.228% for Direct PLUS loans.

Daily Interest Formula

As mentioned, federal loans use a simple daily interest formula:

Interest = (Loan Balance x Interest Rate) / Number of Days in the Year

For example, let’s say you borrowed $20,000 at a 7.00% interest rate. In this case, the daily interest would look like this:

Daily interest = ($20,000 x 0.07) / 365 = $3.83 per day

To determine how much interest you’ll pay over the month, multiply the daily rate by the number of days since your last payment. Using the example above, let’s say it’s been 30 days since your last payment. The formula would look like this:

$3.83 x 30 = $114.90 in interest.

When Does Interest Accrue?

Interest accrues at different times on student loans, depending on the type of loan you have. Interest accrues immediately after the disbursal on all federal loans except subsidized loans. The government pays the interest on Direct subsidized loans while borrowers are in school and for the six-month grace period after graduation.

Interest accrues on private student loans as soon as the loan is disbursed.

Yearly Student Loan Interest Rate vs Monthly Cost

The interest rate on your student loan is yearly, but interest on the loan typically accrues daily and is added to your loan monthly to help determine your monthly payment amount. You can use a student loan payment calculator to figure out your monthly payments.

When you make a payment, your loan servicer will apply your payment to the interest first, then to the principal of your loan. If you pay only the minimum amount due, most of your payment will go toward interest, and your principal loan balance won’t be reduced by much.

Recommended: Applying for No-Interest Student Loans

How to Minimize Student Loan Interest Over Time

There are a few techniques that can help you minimize your student loan interest over the long-term.

Extra Payments

Making extra payments can help you reduce your principal, which can help you save on interest over time. If you get a windfall, such as a birthday gift, or you earn a little extra cash, putting that money toward your student loans can help you pay down your debt faster.

Tell your lender to direct the extra payment toward your loan principal, which can help you shrink the balance.

Early Payments

You can make interest-only payments on your student loans while you’re still in school and during the grace period after graduation. Paying money toward the interest during those times can keep the interest from building up.

Another bonus: If you are paying interest on your loans, you may be eligible to deduct student loan interest come tax time.

Refinancing or Consolidation

You can consolidate, or combine, your federal student loans into a Direct Consolidation Loan. The new loan will have a fixed interest rate, which is a weighted average of the interest rates of the loans being consolidated, rounded up to one-eighth of a percent. This may not necessarily lower your loan payments, but it can make your loans easier to manage, since you’ll have just one payment, instead of multiple payments, to deal with.

If you have private loans, one option is to refinance your student loans. When you refinance, you exchange your current loans for a new private loan from a private lender. Ideally, you may be able to qualify for a lower interest rate, which could lower your monthly payments.

Just be aware that if you refinance federal student loans, you’ll no longer be eligible for federal programs and benefits like income-driven repayment plans, deferment, and forgiveness.

The Takeaway

Student loan interest accrues daily, and the interest is added to your student loan balance monthly. It’s important to stay on top of the interest so that it doesn’t build up over time, costing you more money. Making extra payments, paying down the interest on your loans when you’re still in school, and loan consolidation and refinancing are some of the options you can explore to help manage your student loan debt.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

When does student loan interest start accruing?

Interest begins accruing on private student loans and also on some federal student loans as soon as they are disbursed. However, if you have subsidized federal Direct loans, you don’t have to pay the interest that accrues while you’re in school and during the six-month grace period after graduation. With unsubsidized federal loans and PLUS loans, however, you’re immediately responsible for the interest that accrues.

Do I pay more interest if I make monthly payments?

No, you won’t pay more interest if you make monthly student loan payments. In fact, when you make monthly payments, you’ll pay less in interest over time. If you pay more than the minimum due, the amount you owe in interest will shrink even more. However, if you don’t pay your interest each month, your interest charges will get added to the amount you owe, causing your loan to grow over time.

Can I pay student loan interest early?

Yes, you can pay student loan interest early. You can even pay it while you’re still in school. Paying even small amounts toward the interest can make a difference over time, so if you have a part-time job or you get some extra money, you may want to consider putting some of those funds toward your loans.

Does interest stop accruing when I defer my student loans?

No, interest does not stop accruing when you defer your student loans. During deferment, your loan payments are temporarily paused. However, the interest continues to accrue during that time, and if you have unsubsidized loans, you’re responsible for paying it.

Are student loan interest payments tax deductible?

Yes, student loan interest payments are tax deductible for a qualified student loan. You can deduct the lesser of $2,500 or the amount of interest you paid during the year. When your modified adjusted gross income (MAGI) reaches a certain limit, the deduction eventually phases out.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.