How do monthly interest accrue on student loans?
This question is about interest rates on student loans.
Interest on most student loans accrues daily, but is added to the loan balance monthly, based on the simple interest formula. What simple interest means is that interest is charged only on the original balance outstanding, not the added interest (if any).
The amount of student loan interest that accrues monthly can also vary based on the student loan repayment plan you use. For example, interest was paused in the SAVE plan, but restarted on 1 August 2025. The upcoming Repayment Assistance Plan (RAP) will include interest subsidy and principal reduction relief.
Here are the mechanics of how much interest accrues monthly on a student loan.
Student loan interest formula
The simple interest formula for a student loan is straightforward:
Interest = Principal x Interest Rate x Time
major:The current outstanding balance of your loan.
interest rate:The annual interest rate expressed in decimal terms.
time:The portion of the year over which interest accrues (monthly, which is 1/12).
For example, if you have a student loan with a principal of $30,000 and an annual interest rate of 6%, your monthly interest will be calculated as follows:
Interest = $30,000 x 0.06 x 1/12 = $150
This means that $150 per month is accrued in interest.
Unique aspects of student loan interest
Federal student loans are specifically different from any other type of debt. They have a lot of special rules that can affect the interest of student loans.
Support benefits:Some student loans and repayment plans have an interest subsidy, where the government pays the interest for you. Subsidized student loans have interest support while in school or when deferred. Loans under the SAVE repayment plan have support for any payment that exceeds the income-driven payment amount.
Capitalization:Capitalized interest is interest you owe, but didn’t pay while you were in school, while your loans were in deferment or forbearance, or while you were in an income-driven repayment (IDR) plan. There can be capitalization events where this interest is added to your loan. Learn more about capitalizing student loan interest here.
Ways to reduce monthly interest accrual
Reducing the amount of interest you accrue each month can significantly lower the total cost of your loan over time. Here are some effective strategies:
Enroll in automatic debit: Most lenders (including the Department of Education) allow you to save 0.25% on your interest rate when you enroll in an automatic deduction for your monthly student loan payments.
Make bi-weekly payments: Instead of making one monthly payment, split your payment and pay half every two weeks. This would result in 26 half payments, or 13 full payments per year. This strategy helps you pay off your loans faster, which in turn reduces the interest accrued over time. Learn how to set up your weekly student loan payments here.
Consider refinancing: If you already have private student loans, you can consider refinancing your loans to secure a lower interest rate. A lower interest rate means less interest accrues each month.
Related articles
How to pay off student loans faster
How to get rid of student loan debt
8 ways student loans can get you fired from your job
Editor: Colin Greaves
The post How Much Interest Accumulates Monthly on a Student Loan? appeared first on The College Investor.
