How Student Loan Interest Works
Student loan interest accrues daily based on the outstanding principal balance. The daily interest charge is: Principal Balance x (Annual Interest Rate / 365). On a standard 10-year repayment plan, the monthly payment is fixed using the standard amortization formula. In the early months, more of each payment covers interest; as the balance decreases, more reduces principal.
Federal vs. Private Student Loans
Federal student loans offer income-driven repayment plans, Public Service Loan Forgiveness (PSLF), deferment, and forbearance options that private loans typically do not. Exhaust all federal repayment options before refinancing to private loans -- refinancing removes access to federal protections permanently.
Standard vs. Income-Driven Repayment
The standard 10-year repayment plan produces the lowest total interest cost for federal loans. Income-driven repayment (IDR) plans cap monthly payments at a percentage of discretionary income and extend the repayment period, which reduces monthly payments but significantly increases total interest over time.
Paying Off Student Loans Faster
Even $50 to $100 extra per month applied to principal can shorten a 10-year loan by one to two years. Some borrowers use the avalanche method -- paying the highest-rate loan first -- to minimize total interest across multiple loans.