First, the government will pay the interest charges on subsidized student loans while the borrower is enrolled at least half-time in school. There are certain times that the Department of Education will pay some or all of a borrower’s federal student loan interest on their behalf. Will the government pay my student loan interest for me? However, unpaid interest can be added to the principal (known as capitalization) after a forbearance or deferment period or when a borrower leaves an Income-Driven Repayment (IDR) plan. When paid as agreed, student loans do not typically handle interest in this way. Here are some of the most commonly asked questions: Do student loans use simple or compound interest?Ĭompound interest takes place when interest is added to the principal which causes future interest charges to rise. You probably have a lot of questions about student loan interest. So, in this example, you’d actually save more money by refinancing and keeping your payments the same, instead of keeping your interest rate the same and increasing your monthly payment to $700. And you’d only pay $7,800 in interest overall - a savings of over $10,000!Īnd notice that you’d net these savings even while making the exact same monthly payment of $570. In that case, only $77 of your first payment would be going toward interest. Going back to our sample loan described above, what if you could refinance that 6.5% loan to a 3.5% interest rate. But you may be able to lower your rate by refinancing your federal loans with a private lender. There is no way to change the interest rate on federal student loans through the Department of Education. The other main way to save on student loan interest is to reduce your interest rate. In that case, you’d begin by paying $150 in interest per month and you’d pay $18,000 in interest overall.īut what if you decided to increase your monthly payment by just $130 to $700 per month? In that case, you’d reduce your overall interest cost to $13,395. To see how much you could save with this strategy, first use the calculator to determine how much interest you’re paying at your current interest rate.įor example, let’s say that you have a $50,000 balance at a 6.5% interest rate and a $570 monthly payment. One way to save on interest charges is by making extra payments toward the principal. Wondering how you can use the student loan interest calculator to find savings opportunities? Here are two ways that it can help you. 2 ways to save with the student loan interest calculator As you pay down your balance, a higher percentage of each payment goes toward the principal. Like most installment loans that follow an amortization schedule, more of your payment goes toward interest at the beginning. These total interest charges are reflected in your fixed monthly payment. When you take out a student loan, the lender calculates how much interest you’ll pay in total over the life of the loan (if paid as agreed). As long as your student loan balance is $50,000, you’ll accrue $8 in interest per day or $240 per month. Here’s how you’d calculate your daily interest charge on a $50,000 loan balance. Next, multiply your daily interest by your student loan balance to find your daily interest charge. Here’s what that would look like for an interest rate of 6%. To find your daily interest rate, divide your annual interest rate by 365. Student loan interest is calculated by first determining a borrower’s daily interest rate.
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