How is student loan interest calculated?

Federal student loans use daily simple interest: Daily Interest = Outstanding Balance × (Annual Rate ÷ 365). Each payment first covers accrued interest, then the remainder reduces principal. On a $30,000 loan at 5.5%, daily interest starts at $4.52/day. As you pay down the principal, daily interest decreases. If interest accrues during deferment or forbearance (for unsubsidized loans), it capitalizes — gets added to your principal — increasing your total cost.

What is the standard repayment plan for student loans?

The standard plan sets fixed monthly payments over 10 years (120 payments). It results in the lowest total interest paid among all repayment plans but has the highest monthly payment. For a $35,000 loan at 5.5%, the standard payment is about $380/month with approximately $10,550 in total interest. Graduated and extended plans lower payments but significantly increase total interest paid. Income-driven plans may offer even lower payments with eventual forgiveness.

How much can I save by making extra payments?

Extra payments can dramatically reduce both time and total cost. On a $40,000 loan at 6% over 10 years (standard payment $444/month), adding just $100/month saves $3,600 in interest and pays off the loan 2 years early. Adding $200/month saves $5,800 and finishes 3.3 years early. Target extra payments toward the highest-rate loan first (avalanche method) for maximum interest savings, and confirm your servicer applies extra payments to principal, not future payments.

Should I refinance my student loans?

Refinancing makes sense when you can secure a significantly lower interest rate (at least 1-2% lower), have stable income, and don't need federal protections. However, refinancing federal loans into private loans permanently forfeits income-driven repayment, PSLF eligibility, deferment, and forbearance options. Only refinance federal loans if you're confident you won't need those safety nets. Refinancing private loans has fewer trade-offs since they lack these protections anyway.

What is the difference between a subsidized and unsubsidized student loan?

A subsidized student loan, such as a Direct Subsidized Loan, does not accrue interest while the student is in school, and the government pays the interest on the loan during this time. In contrast, an unsubsidized student loan, such as a Direct Unsubsidized Loan, starts accruing interest as soon as the loan is disbursed, and the borrower is responsible for paying all the interest. For example, if a student borrows $5,000 in unsubsidized loans at a 4.53% interest rate, they will owe around $5,453 after four years, assuming they do not make any payments while in school. This can significantly impact the total cost of the loan over time.

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