Whether you have a fixed interest rate or variable interest rate, the interest on your federal and private loans accrues daily. However, you’re not being charged compound interest. Instead, you’re being charged a daily interest rate.
Your daily interest rate is your annual student loan interest rate divided by the number of days in the year. You calculate the daily interest that accrues on your loan by multiplying your remaining loan balance by your daily interest rate. Here’s an example.
Daily Interest Example: You owe $100 thousand a Federal Direct Loan with a 5% interest rate. It’s an unsubsidized student loan, so you’re responsible for paying all of the interest that accrues. To calculate your daily interest rate, we divide 5% by 365. Your daily interest rate is .00013699. Next, you multiply that rate by the balance of the loan, $100,000, to get the daily interest that’s accruing, $13.69.
Under this scenario, your monthly payment would need to be at least $411 ($13.69 x 30) to cover the daily interest accrual. Unfortunately, the required monthly student loan payments for borrowers in IDR Plans typically are not enough to cover the daily accrued interest. As a result, their loan balances will keep growing until they’re eligible for IDR loan forgiveness after 20 to 25 years.