Most student loans (including all federally guaranteed loans) use a method of interest accrual known as "simple interest." The interest on your student loan(s) is calculated using the simple daily interest method and is based on the outstanding principal balance. Interest accrues daily on your loan(s) and the interest accrues separately from your principal balance. When a payment is received, it is applied to accrued interest first, and the remainder of the payment is applied to the principal balance. The amount of interest assessed on each payment may vary depending on variables such as the number of days between payments and whether all outstanding interest was fully satisfied by the last payment received.
To calculate your interest accrual, use the following formula:
- (Current Principal Balance x Interest Rate) ÷ 365.25 = Daily Interest Accrual Daily
- Interest x Number of Days since Last Payment = Total Outstanding Accrued Interest*
*Assuming your last payment satisfied all the outstanding interest on your account
Mr. Smith has a $15,000.00 loan with a 6.8% interest rate. He made a payment 15 days ago which satisfied all outstanding interest on his loan. If he were to make a $150.00 payment today, how would his payment be applied?
Calculate his Daily Interest Accrual to determine how much interest is due on his loan today:
- 6.8% (0.068) x $15,000 ÷ 365.25 = $2.7926
- $2.7926 x 15 = $41.889 (rounded to $41.89)
Mr. Smith’s $150.00 payment would first satisfy the outstanding interest balance of $41.89. The remaining $108.11 would be applied to his principal balance of $15,000.00.
This formula says to multiply your current principal balance by the interest rate and then divide the result by 365.25. The result is your daily interest accrual, or how much interest you would pay for one day. You can multiply this number by a specific number of days to calculate your interest accrual over a certain amount of time.
- Current principal balance: $20,000.00
- Interest rate: 4.50%
- Days of interest needed: 30
Just plug in the numbers to calculate the approximate 30-day interest accrual: [(20,000 x .045) ÷ 365.25] x 30 = $73.92. You may view your unpaid accrued interest via your online account.
For more information detailing how different monthly payment amounts affect the amount of interest you pay over the life of your loan(s) visit our Loan Repayment Calculator.