How Does Interest Accrue On Student Loans?

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louie and piglet

When interest accrues on Piglet, it doesn’t result in bigger debt—it results in bigger cats!

Helping people understand student loans is our job at SALT™, and few are better at it than Betsy Mayotte—the director of regulatory compliance for American Student Assistance® (our parent company). We told borrowers to “Just Ask” her questions, so check out her answers below (as well as her cat—because if Piglet can’t make student loans better, what can?). 


Timing For Income-Based Repayment Application

I’m trying to decide whether to do income-based repayment (IBR) for my loans. How long does it take to apply and be accepted for this option? I have to start repaying on November 11.

The timing really depends on the servicer (the company you send your payments to). I would really try to send the application in by next week if you can. In general, they take a week or two to process, but with so many new graduates going into repayment this time of year, your servicer will have a much larger volume to handle.

You can always change your plan if IBR is not what you were looking for—so it may be better to submit the application now and withdraw down the line if you need to. When it comes down to renewing your IBR payment, you will generally be asked to submit your renewal paperwork 45-60 days before your current IBR expires. This timing helps you avoid any interruption (and any significant increase in your payments that could come with it).

Calculating How Interest Accrues On Loans

I have a $33,000 student loan, and I have been in repayment for a few years. It seems that I am paying $300 each month, and it is going nowhere because it all goes to interest. I have a few questions. First, is there a way to lower the interest rate? I am currently at 7.35%. Second, my amounts that go toward the principal seem to vary a great deal each month, even though I pay right around the same time each month. Why is this? Shouldn’t the amount be about the same each month when I pay within the same week each month?

If this is a federal student loan, I’m afraid you won’t be able to lower the interest rate. If it’s a private student loan, you may have some success looking for someone who consolidates private student loans to see if you would qualify for a lower rate (it’s usually based on your credit rating). Here’s a list of everyone we know that currently offers private loan consolidation.

It is strange that you say the amount that goes to principal each month varies even though you pay around the same time every month. Interest on federal (and most private) student loans accrues daily, so if you are paying every 30 days or so, you should see around the same amount going to principal every month.

A quick-and-dirty calculation to see how the interest accrues month to month is to multiply your outstanding balance by your interest rate and divide by 365.25—this gives you your daily interest. (Editor’s note: Hey, that’s the name of a thing!) Multiply that amount by the number of days between payments, and you should get the approximate interest since your last payment.

For example, based on your info, the calculation would be:

  • 33,000 × 0.0735 = 2,552.55
  • 2552.55/365.25 = 6.9885
  • 6.9885 × 30 days = 209.65

Remember, the balance will go down a little between every payment, so be sure to use your actual outstanding principal balance (you should be able to see that on your payment history).

Also, you can save money on interest in the long run by paying extra when you can. There is no pre-payment penalty on student loans, and you only pay interest on the outstanding balance to date, so even an extra $5 per month can make a big difference.

Have a student loan question you need an answer to? Just Ask.

(Note: The questions and answers above are real; however, they have been edited for grammar and clarity, but not by Piglet.)

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