How is student loan interest calculated?
Most student loans (including all federally guaranteed loans) use a method of interest accrual known as “simple interest.” The difference between simple interest and compound interest (the type of interest that accrues on most major credit cards) is that simple interest is only calculated on the principal balance, not on the previously accrued interest. To calculate your daily interest accrual, the following formula should be used: (Current Principal Balance x Interest Rate) ÷ 365.25 Translated, this equation means that your current principal balance would be multiplied by the interest rate and then the product would be divided by 365.25 (the number of days in one year). The result of these calculations could then be multiplied by a specific number of days to determine how much interest would accrue in a specific time frame. Example: • Current principal balance: $10,000.00 • Interest rate: 5.750% • Days of interest needed: 30 Using the formula shown above, we can easily calculate the 3
