<p>Greetings,
Does anyone know how to calculate student loan interest? I googled "student loan formula" and I came up with a formula called the "simple daily interest" formula. I used it on my Stafford student loan, but it didn't match the interest shown on my repayment bill. </p>
<p>I have a loan of $8,683.26 at 6.8% interest. According to the simple daily interest formula my interest should come out to ~$5,820 if paid off in 120 months. But according to my bill the interest is $3,497.58. How'd they get that number?</p>
<p>So I was wondering, can anyone give me a link to a good site that explains student loan interest in more detail that includes the exact formula they use to calculate the interest. </p>
<p>Thanks, and sorry for the long, numbery, post, I just really want to figure this out.</p>
<p>A simple interest basis would mean you would be paying interest on the full loan for the entire duration of the loan, which would be a very bad thing (8683.26 x 6.8% x 10 = @5900). If you were not paying off the loan but just paying the interest, then that would be the interest you are paying. </p>
<p>Thankfully that is not how interest works when you are paying the interest and the paying the loan off. You will pay interest on the declining balance of the loan. </p>
<p>To give a simplified example: on a loan of $10000 the interest for a month would be 10000 x .068/12 = $56.67. If that first month you made a payment of $115, $56.67 would go to interest and $58.33 to paying off the loan. This would leave a balance of $9941.67. SO interest for month 2 would be 9941.67 x .068/12 = $56.33. The $115 payment would be $56.33 interest (a little less), while the amount going to paying of the loan would be a little higher ($56.67). Each month the interest amount will be a little lower, and the amount paying the actual loan off will be a little higher. As the loan balance declines, the amount of interest also declines.</p>
<p>Finaid.org has a loan calculator.</p>