Understanding Student Loan Interest Accrual
When you take out a student loan, it's crucial to understand how interest works. Interest is essentially the price you pay for borrowing money. It's calculated as a percentage of the principal amount, and it significantly impacts the total cost of your loan. Understanding how student loan interest works and how it’s calculated can help you manage your debt more effectively-and potentially save you money.
How Student Loan Interest Works
Interest accrues (builds) daily on the unpaid principal balance. The amount of interest you owe depends on your loan’s interest rate, the amount of your loan, the time it takes to repay it, and other loan terms.
Daily Interest Calculation
Student loan interest is calculated daily and added to your balance monthly. To calculate your student loan interest:
- Find the daily interest rate: Divide your annual interest rate by the number of days in the year.
- Determine daily interest accrual: Multiply your daily interest rate by your outstanding loan balance to determine how much interest accrues each day.
- Calculate monthly interest: Multiply your daily interest accrual by the number of days in your billing cycle.
Fixed vs. Variable Interest Rates
There are two main types of interest rates: fixed and variable. Understanding the difference is crucial for managing your student loan. The primary types of student loan interest are fixed and variable.
Fixed Interest Rates
Fixed interest rate loans have an interest rate that remains the same for the life of the loan. Rates may vary depending on the type of loan and the date the loan was issued. Loans disbursed after 07/01/2006 have a fixed interest rate that is not subject to change. This means your monthly payments will be predictable, and you’ll know exactly how much you’ll pay over the loan term.
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Variable Interest Rates
Unlike fixed-interest rate loans, variable interest rates fluctuate over time to mirror market conditions. Variable interest rates are typically tied to a financial index and can rise or fall based on the current market interest rates. Variable interest rates are tied to an index and change annually if the index changes. When variable interest rates change, lenders are required to ensure that the loan is paid off at the agreed upon time per the Master Promissory Note. While variable rates are sometimes lower than fixed rates, they’re also less predictable.
The Impact of Capitalization
When calculating your student loan interest, it’s also important to understand the concept of capitalization. Capitalization occurs when unpaid interest is added to your principal balance. When interest is capitalized, it increases the principal balance of your loan, which means you’ll be paying interest on a larger amount. This makes your total debt bigger, so you’ll pay interest on a higher amount going forward. Capitalized interest means more expense. This can increase the total cost of your loan and make your monthly payments higher.
When Interest Starts Accruing
Interest on student loans typically starts accruing as soon as the loan is disbursed. This means that your loan could accumulate interest even while you’re still in school. However, with some types of loans, like subsidized federal loans, the government will pay the interest while you’re in school, during the six-month grace period after you leave school, and during any periods of deferment. That’s why it is important to understand the difference between subsidized vs. unsubsidized loans. For unsubsidized loans, the interest starts accruing when the loan is disbursed.
Managing Your Student Loan Interest
Understanding how student loan interest works is just one part of managing your student loans effectively.
Strategies to Reduce Interest Paid
You can use several strategies to reduce the total interest paid on your student loans. One of the most effective ways is making a payment more than the minimum monthly amount. See how paying more can have a positive impact on your loan balance. If you entered "Never" on the left, try selecting a different frequency and enter a manageable payment amount. Or, if you are are already making payments, try increasing the amount. Another strategy is to refinance your student loans. Refinancing involves taking out a new loan with a lower interest rate to pay off your existing loans. Refinancing can reduce your monthly payment and the total amount of interest you pay.
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Avoiding Default
You could face serious consequences if you don’t make your student loan payments. Your loan could become delinquent, and if you continue to miss payments, it could go into default. In addition, if you default on federal student loans, the government can collect the debt, including garnishing your wages or withholding your tax refund. If you’re struggling to make your student loan payments, it’s important to reach out to your lender as soon as possible.
Many student loans offer deferment or forbearance options, which allow you to temporarily stop making payments or reduce your payment amount if you’re facing financial hardship.
Tools and Resources
From college degree ROI calculators to federal loan simulators, there are plenty of tools and resources available to help you understand how to calculate student loan interest. In addition to online calculators, your loan provider should give you detailed loan statements that break down your payments into principal and interest. Your provider should give you a clear picture of how your payments are applied and how much of your loan balance is still outstanding.
Recent Policy Changes and Legal Challenges
The Department of Education announced it will take an additional step to bring fiscal responsibility to the federal student loan portfolio by restarting interest accrual for borrowers with loans in the illegal Saving on a Valuable Education (SAVE) Plan on August 1, 2025. The Department will take this action to comply with a federal court injunction that has blocked implementation of the SAVE Plan, including the Department’s action to put SAVE borrowers in a zero percent interest rate status. The Department had the authority under the SAVE plan to prevent borrowers from going into negative amortization, which is the authority the Department relied on to put borrowers in zero percent interest rate status. Outside of that regulatory provision in SAVE (which is enjoined), the Department lacks the authority to put borrowers into a zero percent interest rate status.
Millions of borrowers enrolled in the Biden Administration’s SAVE Plan based on the false promise of loan cancellation and zero monthly payments, despite multiple federal courts striking down such policies. The Biden Administration also invented a zero percent “litigation forbearance,” forcing taxpayers to foot the bill and leaving borrowers without clear direction on how to legally repay their loans.
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The Trump Administration will support borrowers in selecting a new, legal repayment plan that best fits their needs and helps them get on a sustainable financial path while protecting American taxpayers. Tomorrow, the Department will begin direct outreach to the nearly 7.7 million borrowers enrolled in the SAVE Plan, with instructions on how to move to a legal repayment plan so borrowers can begin making qualifying payments.
“For years, the Biden Administration used so-called ‘loan forgiveness’ promises to win votes, but federal courts repeatedly ruled that those actions were unlawful. Secretary of Education Linda McMahon. “Since day one of the Trump Administration, we’ve focused on strengthening the student loan portfolio and simplifying repayment to better serve borrowers. As part of this effort, the Department urges all borrowers in the SAVE Plan to quickly transition to a legally compliant repayment plan - such as the Income-Based Repayment Plan. Borrowers in SAVE cannot access important loan benefits and cannot make progress toward loan discharge programs authorized by Congress.”
Just weeks after the Supreme Court ruled the Department cannot unilaterally waive federal student loans in Biden v. Nebraska, the Biden Administration announced the SAVE Plan in a renewed effort to implement illegal student loan bailouts on the backs of hardworking American taxpayers. In June 2024, a federal court blocked parts of the SAVE Plan. As a result, borrowers enrolled had their federal student loans placed in forbearance with a zero percent interest rate. In February 2025, the Eighth Circuit Court of Appeals held that the SAVE Plan is unlawful. A federal district court entered an injunction in April 2025 to implement the Eighth Circuit decision. To comply with this injunction, the Department is instructing its federal student loan servicers to begin charging interest on impacted loans starting on August 1, 2025. Interest will not be assessed retroactively. Detailed information for borrowers about court actions related to Income-Driven Repayment (IDR) plans is available at StudentAid.gov/courtactions.
Next Steps for Borrowers in the SAVE Plan
Borrowers in the SAVE Plan will see their loan balances grow when interest starts accruing on August 1. When the SAVE Plan forbearance ends, borrowers will be responsible for making monthly payments that include any accrued interest as well as their principal amounts. To compare available repayment plans, the Department encourages borrowers with loans in the SAVE Plan to use the Loan Simulator to estimate monthly payments under available repayment plans, determine repayment eligibility, and learn which option best meets their repayment goals. Borrowers who previously submitted an IDR application and selected the Income-Based Repayment, Pay As You Earn (PAYE), or Income-Contingent Repayment (ICR) Plan do not need to submit a new application.
SAVE Plan borrowers working toward legal loan discharges, such as through the Public Service Loan Forgiveness Program, must switch out of the SAVE Plan to an alternative IDR repayment plan to start making qualifying payments. On July 4th, President Trump signed the One Big Beautiful Bill Act into law, which includes a new income-based Repayment Assistance Plan that will be available to borrowers by July 1, 2026. Since the One Bill Beautiful Bill Act envisions restricting enrollment in PAYE and ICR Plans in the future, and because those two repayment plans are currently impacted by legal challenges as well, the Department urges SAVE borrowers to consider enrolling in the Income-Based Repayment Plan authorized under the Higher Education Act until the Department can launch the Repayment Assistance Plan.
Income-Driven Repayment (IDR) Application
Applying for an IDR Plan is quick and easy if borrowers provide consent for the Department to obtain their federal tax information directly from the Internal Revenue Service. This allows the Department to process borrowers’ IDR applications faster and eliminates the need for borrowers to manually upload their income information. When borrowers allow the Department to access their federal tax information, annual recertification of borrowers’ IDR plans is automatic. The Department continues to make progress on the backlog of submitted IDR applications because of a processing pause put in place by the Biden Administration. Department of Treasury.
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