How student loan interest is calculated
Student loans use the simple daily interest formula:
A $27,000 loan at 6.5% accrues about $4.81 a day, or roughly $146 a month. Interest is "simple" because, day to day, it's charged on the principal only, not on earlier unpaid interest.
Subsidized vs unsubsidized loans
For Direct Subsidized Loans (for undergraduates with financial need) the government pays the interest while you're in school at least half-time, during the grace period and during deferment. For unsubsidized and private loans, interest accrues the whole time.
What is capitalization?
When unpaid interest is added to your principal, it's capitalized. From then on, you pay interest on that interest. On federal loans, capitalization now generally happens only in limited situations, such as when a deferment ends on an unsubsidized loan or when you consolidate; private lenders usually capitalize when repayment begins. This calculator shows the effect of capitalizing all unpaid interest when repayment starts.
How to reduce interest while in school
- Pay the monthly interest while in school, even $25 to $50 a month, to prevent it from piling up.
- Borrow subsidized federal loans first if you're eligible.
- Make a payment before the grace period ends to wipe out accrued interest before it can capitalize.
Frequently asked questions
Do student loans compound interest?
How much interest accrues on my student loan per month?
Does interest accrue during the grace period?
Last reviewed: 2026-10-09