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.
Table of Contents
Key Points
• Student loan interest rates are typically expressed annually, but the accrued interest is added to the principal balance each month.
• Interest on student loans generally accrues daily, steadily accumulating over time.
• The interest rate of student loans varies by loan type. The rates for federal student loans are set annually by Congress.
• Federal student loans have fixed interest rates, while private student loans may have fixed or variable rates.
• Making extra loan payments, paying interest while in school, loan consolidation, and student loan refinancing are ways to potentially help manage 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.
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