Does Federal Student Loan Interest Compound Continuously

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Like virtually any other loan, you'll have to pay interest if you take out a student loan. Interest is the price lenders charge in return for lending money. When you make a payment on a student loan, part of it will go to the principal while the rest will apply to the interest.

Student loans can have simple or compound interest, which will affect how your lender calculates your interest charges.

Here's what you should know about student loan simple interest and compound interest:

• Are student loans compound or simple interest?
• How student loan interest works
• Why do some student loans have compound interest?
• When does student loan interest accrue?
• Consider refinancing to save money on interest

Are student loans compound or simple interest?

The majority of student loans — including all federal student loans and most private student loans — operate on simple interest. However, some private loans use compound interest.

• Simple interest is calculated based on the loan amount you originally borrowed.
• Compound interest is calculated based on your loan amount as well as any unpaid interest that has accrued on the loan. Unlike simple interest, compound interest essentially charges you interest on your interest.

Learn More: Average Student Loan Interest Rates

How student loan interest works

The type of interest — simple or compound — affects how your lender will calculate your total student loan interest. Here's how it works:

Calculating simple student loan interest

Simple student loan interest is calculated using the following formula:

Principal x Interest rate x Loan term = Simple interest

For example: Say you have a $15,000 student loan with a 4% interest rate and a five-year repayment term. The simple interest on this loan would be calculated as 15,000 x 0.04 x 5 = $3,000. This means you'd pay $3,000 in simple interest over the life of the loan.

To see how much your daily interest would be, you'd start by dividing your interest rate by 365 to find your daily interest rate, then multiply this by the principal. In this case, this would look like (0.04 / 365) x 15,000, which equates to about $1.64 in daily interest.

Calculating compound student loan interest

Calculating compound interest is more complicated compared to simple interest. The formula for it looks like this:

(Principal (1 + Interest rate) ^{Number of compounding periods for a year}) – Principal = Compound interest

For example: Say you have a $20,000 loan with a 5% interest rate and a five-year repayment term. The equation to calculate the compound interest would look like this: (20,000 (1 + 0.05) 5) – 20,000 = 5,525.63

This is how much you'd pay in compound interest over the life of the loan. Keep in mind that how much you'd pay in interest per year would vary because compound interest takes into account the interest that has already accumulated on the loan.

How often the interest compounds — for example, annually, semiannually, or quarterly — will also have a major impact on your total interest charges.

Additionally, with compounding interest, the daily interest will continually be added to your balance and will affect how much you're charged the following day.

For example: Say you wanted to calculate the daily interest from the above example. To start, you'd first divide your interest rate by 365 to find your daily interest rate — so 0.05 / 365, which equates to about 0.000136. Multiplying this by the principal (0.000136 x 20,000) would then equate to about $2.72 in daily interest at the beginning of your repayment term.

The next day, this $2.72 would be added to your balance and used to calculate your daily interest.

• Day 1: 0.000136 x $20,000 = $2.72
• Day 2: 0.000136 x $20,002.72 = $2.7203
• Day 3: 0.000136 x $20,005.44 = $2.7207

Calculating compound interest can be confusing — but thankfully, you don't have to be a math expert to find out what your interest costs will look like on a loan with compounding interest.

Several online compound interest calculators are available that can help you easily figure out how compound interest can impact a loan or even a savings account.

Why do some student loans have compound interest?

While most student loans charge simple interest, some private student loans come with compound interest that could increase your overall interest costs.

Additionally, while all federal student loans come with fixed interest rates that will stay the same throughout the life of the loan, private student loans can have fixed or variable rates. A variable rate can fluctuate according to market conditions, which means you could end up paying more or less in the future.

Keep in mind: Even if you have a simple interest loan, compounding could still come into play. For example, if you're struggling to make payments on federal student loans, you might be eligible for deferment or forbearance — two options that let you temporarily postpone your payments.

If you don't cover the interest that accrues during this pause, the unpaid interest could be added to your principal loan balance — this is known as capitalization. This means that interest will be charged on this higher amount going forward, which will increase your overall loan cost.

Check Out: Student Loan Deferment vs. Forbearance: How to Choose

How does interest work for subsidized and unsubsidized loans?

If you need to borrow for school, it's usually best to start with federal Direct Subsidized Loans before turning to federal Direct Unsubsidized Loans and other kinds of student loans. Here's how these federal student loans work:

• Direct Subsidized Loans are available to undergraduate students with financial need. The government covers any interest that accrues on these loans while you're in school at least half time, during your six-month grace period after leaving school, and during any deferment periods. This can help you save money on interest over the life of the loan.
• Direct Unsubsidized Loans are available to undergraduate, graduate, and professional students, regardless of financial need. Unlike with subsidized loans, you're responsible for all the interest that accrues on unsubsidized loans during all periods. Also keep in mind that if you don't pay the interest that accrues on an unsubsidized loan while you're in school, during your grace period, or during deferment periods, it will be capitalized and added to your principal loan balance.

When does student loan interest accrue?

Student loan interest begins accruing as soon as your loan is disbursed by the school — not just when you have to make payments. If you have a Direct Subsidized Loan, the government will cover this accrued interest while you're in school.

But if you have a Direct Unsubsidized Loan or another type of student loan, it could be a good idea to at least make interest payments during deferment periods to keep this interest from capitalizing. Also remember that interest will continue to accrue during forbearance periods, and any unpaid interest will likely be capitalized afterward.

Keep in mind: Due to the COVID-19 pandemic, payments and interest accrual have been paused on federal student loans by the CARES Act through at least Dec. 31, 2022.

Learn More: How to Recertify for Income-Driven Repayment

Consider refinancing to save money on interest

If you'd like to save money on interest, refinancing your student loans could be a good option. Refinancing is the process of paying off your old loans with a new private student loan — leaving you with just one loan and payment to manage.

Depending on your credit, refinancing might get you a lower interest rate, which could reduce your overall interest charges and even potentially help you pay off your loans faster.

Keep in mind: While you can refinance both federal and private loans, refinancing federal student loans will cost you access to federal benefits and protections — such as income-driven repayment plans and student loan forgiveness programs.

This also means you'll no longer be eligible for the temporary suspension of federal student loan payments and interest accrual provided by the CARES Act.

If you decide to refinance your student loans, be sure to shop around and consider as many lenders as possible to find the right loan for your needs. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.

Lender	Fixed rates from (APR)	Variable rates from (APR)	Loan terms (years)	Loan amounts
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	2.94%+	N/A	10, 15, 20	$7,500 up to $500,000 (larger balances require special approval)
Fixed APR: 2.94%+ Variable APR: N/A Min. credit score: Does not disclose Loan amount: $7,500 up to $500,000 Loan terms (years): 10, 15, 20 Max. undergraduate loan balance: $250,000 - $500,000 Time to fund: 4 days Repayment options: Immediate repayment, forbearance, loans discharged upon death or disability Fees: None Discounts: Autopay Eligibility: Must be a U.S. citizen or noncitizen with proof of residency card, have an acceptable income and credit history or an approved cosigner, and have entered grace or repayment on the loans he or she wants to refinance Customer service: Phone Soft credit check: Yes Cosigner release: After 12 months Loan servicer: Kentucky Higher Education Student Loan Corporation Max. graduate loan balance: $250,000 - $500,000 Credible Review: Advantage Education Loan review Offers Parent PLUS Refinancing : Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	2.49%+	4.82%+	5, 7, 10, 15, 20	$10,000 up to $250,000 (depending on degree)
Fixed APR: 2.49%+ Variable APR: 4.82%+ Min. credit score: 690 Loan amount: $10,000 to $400,000 Loan terms (years): 5, 7, 10, 15, 20 Repayment options: Military deferment, forbearance Fees: Late fee Discounts: Autopay Eligibility: Must have a credit score of at least 720, a minimum income of $60,000, and must be a resident of Texas Customer service: Email, phone Soft credit check: Does not disclose Cosigner release: No Loan servicer: Firstmark Services Max. Undergraduate Loan Balance: $100,000 - $149,000 Max. Graduate Loan Balance: $200,000 - $400,000 Offers Parent PLUS Refinancing: Does not disclose
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	4.49%+1	3.99%+1	5, 7, 10, 15, 20	$10,000 to $500,000 (depending on degree and loan type)
Fixed APR: 4.49%+1 Variable APR: 3.99%+1 Min. credit score: Does not disclose Loan amount: $10,000 to $750,000 Loan terms (years): 5, 7, 10, 15, 20 Repayment options: Immediate repayment, academic deferment, military deferment, forbearance, loans discharged upon death or disability Fees: Late fee Discounts: Autopay, loyalty Eligibility: Must be a U.S. citizen or permanent resident and have at least $10,000 in student loans Customer service: Email, phone, chat Soft credit check: Yes Cosigner release: After 24 to 36 months Loan servicer: Firstmark Services Max. Undergraduate Loan Balance: $100,000 to $149,000 Max. Graduate Loan Balance: Less than $150,000 Offers Parent PLUS Refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	4.49%+2	3.69%+2	5, 7, 10, 12, 15, 20	$5,000 to $300,000 (depending on degree type)
Fixed APR: 4.49%+2 Variable APR: 3.69%+2 Min. credit score: Does not disclose Loan amount: $5,000 to $300,000 Loan terms (years): 5, 7, 10, 12, 15 Repayment options: Military deferment, forbearance, loans discharged upon death or disability Fees: Late fee Discounts: Autopay Eligibility: All states except for ME Customer service: Email, phone, chat Soft credit check: Yes Cosigner release: After 24 to 36 months Loan servicer: College Ave Servicing LLC Max. Undergraduate Loan Balance: $100,000 to $149,000 Max. Graduate Loan Balance: Less than $300,000 Offers Parent PLUS Refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	5.91%+5	5.74%+5	5, 10, 15, 20	$1,000 to $250,000
Fixed APR: 5.91%+5 Variable APR: 5.74%+5 Min. credit score: 700 Loan amount: $7,500 to $200,000 Loan terms (years): 5, 10, 15, 20 Repayment options: Immediate repayment, academic deferment, forbearance, loans discharged upon death or disability Fees: None Discounts: Autopay Eligibility: Must be a U.S. citizen or permanent resident and submit two personal references Customer service: Email, phone Soft credit check: Yes Cosigner release: After 36 months Loan servicer: Granite State Management & Resources (GSM&R) Max. Undergraduate Loan Balance: $150,000 to $249,000 Max. Graduate Loan Balance: $150,000 to $199,000 Offers Parent PLUS Refinancing : Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	4.29%+3	2.48%+3	5, 7, 10, 12, 15, 20	$10,000 to $250,000
Fixed APR: 4.29%+3 Variable APR: 2.48%+3 Min. credit score: 680 Loan amount: $10,000 to $250,000 Loan terms (years): 5, 7, 10, 12, 15, 20 Repayment options: Forbearance Fees: None Discounts: None Eligibility: Must be a U.S. citizen or permanent resident, have at least $15,000 in student loan debt, and have a bachelor's degree or higher from an approved school Customer service: Email, phone Soft credit check: Yes Cosigner release: No Loan servicer: Mohela Max. Undergraduate Loan Balance: $250,000 Max. Graduate Loan Balance: $250,000 Offers Parent PLUS Refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	5.18%+4	3.67%+4	5, 10, 15, 20	$5,000 to $250,000
Fixed APR: 5.18%+4 Variable APR: 3.67%+4 Min. credit score: 670 Loan amount: $5,000 to $250,000 Loan terms (years): 5, 10, 15, 20 Repayment options: Academic deferment, military deferment, forbearance Fees: Late fee Discounts: Autopay Eligibility: Must be U.S. citizen or permanent resident Customer service: Email, phone, chat Soft credit check: Yes Cosigner release: Yes Max undergraduate loan balance: $250,000 Max graduate loan balance: $250,000 Offers Parent PLUS refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	3.94%+ 7	N/A	5, 7, 10, 12, 15, 20	Up to $300,000
Fixed APR: 3.94%+ 7 Variable APR: N/A Min. credit score: 670 Loan amount: Up to $300,000 Loan terms (years): 5, 7, 10, 15, 20 Time to fund: Usually one business day Repayment options: Academic deferral, military deferral, forbearance, death/disability discharge Fees: None Discounts: Autopay Eligibility: Available in all 50 states Customer service: Email, phone Soft credit check: Yes Cosigner release: After 24 months Max. undergraduate loan balance: $300,000 Max. graduate balance: $300,000 Offers Parent PLUS loans: Yes Min. income: None
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	4.5%+	N/A	7, 10, 15	$10,000 up to the total amount of qualified education debt
Fixed APR: 4.5%+ Variable APR: N/A Min. credit score: 670 Loan amount: $10,000 up to the total amount Loan terms (years): 7, 10, 15 Repayment options: Military deferment, loans discharged upon death or disability Fees: None Discounts: None Eligibility: Must be a U.S. citizen or permanent resident and have at least $10,000 in student loans Customer service: Email, phone Soft credit check: Yes Cosigner release: No Loan servicer: AES Max. Undergraduate Loan Balance: No maximum Max. Gradaute Loan Balance: No maximum Offers Parent PLUS Refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	5.49%+	N/A	5, 8, 12, 15	$7,500 to $300,000
Fixed APR: 5.49%+ Variable APR: N/A Min. credit score: 670 Loan amount: $7,500 to $300,000 Loan terms (years): 5, 8, 12, 15 Repayment options: Does not disclose Fees: None Discounts: None Eligibility: Must be a U.S. citizen and have and at least $7,500 in student loans Customer service: Email, phone, chat Soft credit check: Yes Cosigner release: After 12 months Loan servicer: PenFed Max. Undergraduate Loan Balance: $300,000 Max. Graduate Loan Balance: $300,000 Offers Parent PLUS Refinancing: Yes
Credible Rating Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology. View details	4.29%+	N/A	5, 10, 15	$7,500 up to $250,000 (depending on highest degree earned)
Fixed APR: 4.29%+ Variable APR: N/A Min. credit score: 680 Loan amount: $7,500 to $250,000 Loan terms (years): 5, 10, 15 Repayment options: Academic deferment, military deferment, forbearance, loans discharged upon death or disability Fees: None Discounts: Autopay Eligibility: Available in all 50 states; must also have at least $7,500 in student loans and a minimum income of $40,000 Customer service: Email, phone Soft credit check: Does not disclose Cosigner release: No Loan servicer: Rhode Island Student Loan Authority Max. Undergraduate Loan Balance: $150,000 - $249,000 Max. Graduate Loan Balance: $200,000 - $249,000 Offers Parent PLUS Refinancing: Yes
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All APRs reflect autopay and loyalty discounts where available | 1Citizens Disclosures | 2College Ave Disclosures | 5EDvestinU Disclosures | 3 ELFI Disclosures | 4INvestEd Disclosures | 7ISL Education Lending Disclosures

About the author

Angela Brown

Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.

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