Interest Accrual
Understanding the way interest accrues on your student loan is essential to understanding how your student loan works. The most important fact to understand about student loans is that interest accrues on them every single day, even if your account is not in repayment. Additionally, payments made on a student loan account can only satisfy interest currently accrued on the account; a payment cannot satisfy future interest.
Interest Accrual Formula
When you signed for your student loan, the amount you agreed to pay for the disbursement check and all applicable loan fees becomes your principal balance. The promissory note also explained how interest accrues on that principal balance. We use a simple-interest formula to calculate your daily interest accrual:
Interest rate x current principal balance ÷ number of days in the year = daily interest
Sara Student has a $10,000.00 current principal balance and 6% interest rate this year. Using the formula:
.06 x $10,000.00 ÷ 365 = 1.6438356… (round to $1.64)
If this were a Leap Year:
.06 x $10,000.00 ÷ 366 = 1.639344… (round to $1.64)
How Payments Apply to Interest vs. Current Principal Balance
Interest accrues on your student loan from the day the loan is disbursed until the day you make the very last payment. The best way for you to control the amount of your payment that counts toward interest versus principal is to make your payments regularly and on time. The easiest way to do this is to enroll in the Direct Debit program because payments will automatically be processed every month on the exact due date.
Depending on the lender/owner of your student loan, we are required to apply payments in this order:
- Accrued interest >> Late payment (if applicable) >> Current principal balance
- Late Payment (if applicable) >> Accrued interest >> Current principal balance
At the time that you make a payment, our computer system counts the number of days since we processed your last payment. The amount of interest that has accrued every day between the date of the last payment and the new payment must be satisfied first. Assuming your payment is not late, the remainder then counts toward the current principal balance. If your payment is late, your late fee is paid before we can apply any funds to your current principal balance.