Whether you hope to pay your loans off early or just want to keep track of your progress, it’s important to understand how student loan interest is calculated. The basic formula you need to know and understand looks like this:
Interest rate X Current balance / Number of days in the year = Daily Interest
Now we’ll put this formula into practice. Let’s say you have the average amount of student loan debt for 2016 college graduates, which was $37,172 according to U.S. News and World Report. Your interest rate is fixed at 6 percent. Your daily interest charges would follow the formula and look like this:
.06 X $37,172 / 365 = $6.11 per day
While $6.11 per day may not seem like a lot, keep in mind this interest accrues daily. Over the course of a 30-day month, you’re paying $183.30 at this rate. Over twelve months, that’s $2,199.60.
With that in mind, let’s look at one more example. Imagine you owe the same $37,172, but enjoy a fixed 4 percent interest rate instead. Your daily interest charges would look like this:
.04 X $37,172 / 365 = $4.07 per day
That works out to $122.10 over 30 days and $1,465.20 over the course of a year.