#how to calculate interest on a loan
Understanding the way interest accrues on your student loan is essential to understanding how your student loan works. Interest accrues on your student loan every single day. even if your account is not in repayment. Additionally, your payments satisfy only the interest currently accrued on the account; a payment cannot satisfy future interest.
For more on interest, read our Interest FAQ or view the current Interest Rate Charts .
Interest Accrual Formula
When you sign for your student loan, the amount you agree to pay for the disbursement check and all applicable loan fees becomes your principal balance. Your promissory note explains how interest accrues on that principal balance. We use a simple formula to calculate your daily interest accrual:
Interest rate x Current principal balance Number of days in the year = Daily interest
For example, Sara Student has a $10,000 current principal balance and 6% interest rate this year. Using the formula:
0.06 x $10,000 365 = 1.6438356 (Round to $1.64)
If this were a leap year:
0.06 x $10,000 366 = 1.639344 (Round to $1.64)
How Payments Apply to Interest vs. Current Principal Balance
Interest accrues on your student loan from the day the loan is disbursed until the day you make the very last payment. The best way for you to manage the amount you owe toward interest vs. principal is to make your payments regularly and on time. The easiest way to do this is to sign up for Direct Debit. which automatically processes your payments every month on the exact due date.
Depending on the owner of your student loan (the lender), we are required to apply payments in this order:
- Accrued interest Late payment (if applicable) Current principal balance
- Late payment (if applicable) Accrued interest Current principal balance
Whenever you make a payment, we count the number of days since we processed your last payment. Your new payment must first satisfy the amount of interest that accrued in this time. The remainder of your payment then counts toward the current principal balance. If your payment is late, we will pay off the late fee before we apply any funds to your current principal balance.