How much debt costs
As you may know I keep track of how much our debt costs each month – which is basically how much monthly interest we pay toward debt. Shortly after I began tracking these numbers I noticed the interest charged on our student loans varies quite a bit from month to month… so I set off to find out why.
How is student loan interest calculated?
Most student loans (including all federally guaranteed loans) use a method of interest accrual known as the Simplified Daily Interest Formula. The difference between simple interest and compound interest (the type of interest that accrues on most major credit cards) is that simple interest is only calculated on the principal balance, not on the previously accrued interest – this is a good thing. 
Simplified Daily Interest Formula
This is the formula used to calculate all federally guaranteed student loans:
- Daily interest amount = (Current Principal Balance x Interest Rate) ÷ 365.25
- Monthly interest amount = (Daily Interest Amount x number of days in the month)
Here is an example of daily interest calculated out on a student loan of $10,000 at a 6% interest rate:
- Daily interest amount: (10,000 x .06) / 365.25 = $1.6427
- Monthly interest amount: $1.64 x 30 (typical month) = $49.28
The above example shows us that a student loan with a balance of $10,000 and an interest rate of 6% would cost $49.28 in interest in a typical 30 day month.
Interest Rate Factor
Some student loan issuing agencies will make mention of something called the Interest Rate Factor. IRF is simply your interest rate divided by 365.25. If IRF is used in their calculation, rest assured that they are calculating interest the same… they just use a different equation to reach the same number. Here is the equation using the Interest Rate Factor:
- Monthly interest amount = (Number of days since last payment) x (Principal Balance Outstanding) x (Interest Rate Factor)
Let’s plug our example numbers into this equation (our example interest rate factor is .000164271047:)
- 30 x 10,000 x .000164271047 = $49.28
Notice that we received the same monthly interest amount regardless of whether we used the Interest Rate Factor or not… that is because the math is exactly the same, the equation is just structured differently.
Why does the amount fluctuate each month?
Between my student loan and my wife’s student loan we paid $277 in interest for January 2010. In December of 2009 we paid only $261 in interest and in November of 2009 it was $288. Our principal decreases every month, so what’s up with the large fluctuations and how could we have paid more in November of 2009 than in January of 2010 if the principal is less? Great question.
The answer lies in 2 conditional variables that effect the “number of days since last payment” from month to month:
- How many days are in the current month
- Did the last day of the calculation period fall on a weekend or holiday
The number of days since the last payment will obviously differ from month to month based on these two variables.
If the month has 28 days the interest calculated will be less than in a month that has 31 days because 3 extra days were figured into that months calculation. Also, if the last day of the month falls on a weekend or holiday, the calculation will not be performed until the next business day thus increasing that months number of days since last payment.
Thus… regardless of the fluctuation in monthly amounts we will never be charged anymore than 365.25 days worth of interest on our student loans in a given year.
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{ 38 comments… read them below or add one }
Matt,
I was fortunate enough to get my student loans consolidated at a very low fixed interest rate. However….debt is debt….and interest paid is money I’m not saving!
I recently changed my point of view on my student loan debt when I ran the numbers…I assumed that because it was a low interest rate I could take my time paying these off. However, I now realize a better course of action for me is to eliminate this burden as well.
The fact that the interest is only applied to the principle is the main reason I’ve been paying extra AND making sure the extra is applied first to the principle.
Sallie Mae gives you the daily amount of accruing interest on your loans. Seeing this amount tick up daily shows me how much of my payment is going to just interest alone. It’s frustrating when you make a payment and it takes 3-4 days for them to apply it and in the meantime the interest is keeps adding up…It feels like a race you’ll never win but I’ll just keep plodding away! Great explanation.
Thanks for breaking down the difference between “simple interest” and “compound interest.” I actually wondered why that was and now I will be able to explain that to others more clearly. Regardless, my student loan is my last form of debt outside of my house and I am pplanning on paying it off in May 2010, so I won’t have to worry about it much longer
Feels good doesn’t it?
As a result of the Health Care and Education Reconciliation Act, beginning July 1, 2010, federal student loans will no longer be made by private lenders under the Federal Family Education Loan (FFELSM) Program. Instead, all new federal student loans will come directly from the U.S. Department of Education under the Direct Loan Program.
This is not true. Any interest accrued and not paid in full each month is added to the principal balance of your loans, therefore the interest IS compounded more similar to a credit card.
To make the matter worse and more unethical, if you have ever deferred your loans, Sallie Mae does not automatically recalculate your payment plan that was established upon graduation or even clearly inform you that continuing to pay your monthly amounts established by your graduate payment plan will actually INCREASE your principal balance each month. I suspect that many people have found themselves in the same boat as me, where after paying on-time payments for years, I’ve realized that my principal balance has actually grown!
It’s no wonder why the Sallie Mae website and loan structure/payment groups/interest calculations are so cryptic. Helps them steal more money from the pockets of hardworking kids that don’t have the time or wherewithal to decipher their compounding interest scheme.
Sallie Mae is a ruthless, irresponsible organization that takes advantage of the trust that Americans have extended them. Under the cloak of a government-protected, university-sponsored organization that enables Americans to pursue higher learning opportunities lies a more brilliantly cunning business model that could make even the most unscrupulous pyramid scheme or credit card company envious. The greatest trick the Devil ever pulled was convincing the world he didn’t exist.
Hi Danielle, while I appreciate your opinion toward Sallie Mae (I share your loathing) this article is not about Sallie Mae, and they are but one of several student loan lenders. Secondly, the interest calculation above is correct.
Actually I just talked with my student loan vendor, and was told that every month the interest is calculated off the current principle amount NOT the original principle amount so I have to totally agree with Danielle on this one. My original loan was 35,000 but my interest is being calculated by 39,454, because that is the loan plus interest fees. So it is compounded.
Good explanation, I really appreciate it. Does a turning of a new year have any effect on it?
My interest payments are as follows:
November 8: $72
December 6: $52
January 7: $99
I have no idea what’s going on, I make the same payments each month and the days between don’t fluctuate THAT much.
There are a lot of variables at work, but to be sure you need to call your loan provider to inquire.
Matt,
I used your math on my Sallie Mae consolidated loan (9%) & it does accurately depict my last few interest payments, however I took the principal value on 1/27/11 ($17,383.84) and looked at the remaining payments they say I have on that same date (89 payments at $272.96 and 1 payment at $282.03) and created a spreadsheet with your formula. They say my last payment will be on 7/24/18 to pay off the loan, however the spreadsheet says my principal value on 7/24/18 will be -$966.44. How is this possible? It seems as if I will overpay the loan.
Also, I can’t get anyone that understands finance at Sallie Mae to explain to me how I can make principal only payments aside from the regular monthly payment to pay the loan off early. Any advice on that? I erronenously thought all the overpayments I’ve been making were being applied to principal, when in truth they were being applied to future interest. I’m bummed and I’ve overpaid this loan by 2x already and I don’t want to be in the 4x range before it’s over. I believe the Sallie Mae CEO gajillionaire has had enough of my money and I want to do something positive to ensure those crooks don’t get any more of my money than necessary.
Any advice on how to pay this down quickly? I’ve also heard that they take their sweet bippy time applying payments in order to maximize their interest payments.
Hi Julie — The extra payments you make are not being applied to future interest, but actually reduce the principal AND advance the due date for the next payment (assuming the “extra” amount is at least equal to the amount of a whole month’s payment, because it is not possible to advance the due date for the next payment by a partial month, only a full month). So pre-paying does in fact reduce the principal and does in fact reduce the interest that accrues, while also pushing forward the due date which allows more flexibility if you end up needing to “miss” a payment at some point.
I am pretty good at math and finance (used to work at a hedge fund). It took me a while to figure out this is what is happening. They are not clear about it.
Also, I went in my spreadsheet and changed all the dates that fell on weekends or holidays, which were quite a few and now it says my balance on 7/24/18 will be -$961.88.
I can’t think of any other variables I’m missing. Please advise.
Hi Julie. I know it is terribly frustrating dealing with lenders, especially when trying to repay principal in advance… they never like that. Hang in there, have patience and just keep at it. No one will be terribly helpful to you so you just have to develop knowledge and nerves of steel.
You need to get an amortization schedule from Sallie Mae so that you can see exactly how they are calculating the interest on your loan (not sure if this works, but give this a shot too.) Secondly, continue working with someone over the phone until you are told precisely how extra principal payments need to be made. Tell them you have a lawyer that they will hear from if they do not comply to your 2 requests… they’ll play ball.
Do that and let us know how it goes. God bless.
Matt,
Ironically I did that exact method from that site and applied the Interest Rate Factor and it doesn’t seem to work. I noticed in 2 separate pieces of correspondence with Sallie Mae that might balance was the same for 2 different dates which of course cannot be accurate.
I called three times the other day: once was a promise for an American to call me back, once their autodialer hung up on me, and lastly, I spoke to an Indian who could only advise me that “I must pay interest” regardless of the question I was asking…
I have to admit the phone call was hilarious…it reminded me of that credit card commercial where the guy says “jes, jes” to everything..haha
Nevertheless, I will try and call them again. The stress of making that phone call is horrible! I have 11 nieces and nephews, 5 of which are in their first year of high school and I plan on teaching a finance class to all of them…especially the part about college loans.
Did you read the article about how Sallie Mae recommends you paying the interest on your loans while in college so you can save more money? Er…you save more money by borrowing less…especially if you can afford to make interest payments…instead borrow LESS money. They really prey on the financially illiterate….fortunately I’m in recovery.
Thanks for all your advice!
Yeah, lenders are incredibly aggressive in our modern culture, but as you and I are both fully aware… we made our bed. So, the next best thing to do is what we’re both doing – digging ourselves out of our mess and work to teach others to avoid the same mistakes.
I lead Dave Ramsey’s FPU out of my church, it is a great curriculum. Depending on how old your nieces/nephews are I suggest you check into Dave’s kids literature or if they’re old enough just run them through FPU. If someone would have done that for either of us we would most likely be in a much better way… so let’s work to start others off on the right foot by having what we did not.
God bless.
Hi Matt,
Well I spoke with Sallie Mae on the phone this morning for over an hour since I was able to get my hands on a special phone number they have for “consumer advocacy.”
1. She did not have a legible copy of my promissary note & suggested I go back to the original lender to get it until she realized the original lender, USAA Group Loan Services, merged with Sallie Mae. I may never see a legible copy of the original promissary note, but I did put in a request for them to hunt it down via microfiche.
2. She told me that although overpaying the loan does forward the due date out, any amount paid over the interest and fees (i.e., late fees, etc.,) are applied to principal. She said I do not have to send in a separate payment for that to happen. I concluded that I should continue overpaying and ignore the due date since the overpayment will continue to get the due date pushed out, and if I want the overpayment to actually be applied to principal, I need to keep paying every month, regardless of the due date.
3. Apparently they rarely do a recalculation on the loan. They only do it when it would seem that at your current payment you won’t finish paying the loan off by the agreed upon final due date in the original loan. Federal law requires them to recalculate your minimum payment in order for the borrower to make that date, regardless if you’ve been in forebearance. Conversely, they do NOT do a recalculation in the event that you’ve overpaid and will pay the loan off early.
It’s tricky because their correspondence will have a current date with remaining principal balance and on the same correspondence, they will tell you the number of payments, the amounts, and the pay off date. However, that portion is NOT updated so although it may have a current date on the correspondence, that information on the correspondence is erroneous.
I would think they would update all of the information correctly on dated correspondence, but they do not. Additionally, she kept telling me the formula they use assumes 30 days since the last payment for pay off estimates. With all those thousands of employees I would think they would write their formulas more accurately to take into account payment due dates that fall on weekends and/or holidays.
She ran her calculator and since I’ve been paying over the minimum due, my actual minimum payment IF they were to do a recalculation is less (in theory) and that is why their calculation says I’ll pay it off in 7/2018. In truth I will pay it off much sooner.
Thanks for the formula. I feel like I’m in control now since I have a spreadsheet and I can actually see how altering payment amounts and due dates affect the pay off date.
Lastly, I did ask her for an amortization schedule, and she told me the federal government does not allow them to provide that. Ha! That one is hilarious!
At least though I got to speak to a polite, if not overly rambunctious, semi-informed American.
If anyone wants that coveted phone number, send me an email & I’ll provide it!
Awesome Julie, I am glad that you have regained a sense of understanding and control over the loan repayment, and thank you for updating us here. Your information will help other people. I think you should reply to this comment and permanently publish the phone number on this page, that would help many I’m sure.
Sallie Mae Consumer Advocacy – (888) 545-4199
They only work during normal business hours.
Thanks, Matt!
Hi guys,
I believe Sallie Mae is misallocating principal and interest payments.
by increasing the due date, sallie mae is allocating your payments into interest more than principal?
It is fraudulent accounting. b/c they will automatically charge you interest in today’s payment for interest to be accrued in the future when they increase the next payment due date.
Hi Rattan,
I don’t doubt it, but do you have any documented proof of this?
Sallie Mae is not misallocating principal and interest. They charge interest exactly as the formula Matt provided states. If you create a spreadsheet, use the formula exactly like it is without rounding and your numbers will be correct.
It may seem that way, however it is not. They charge late fees, then interest (from the date of last payment), and the remaining amount goes to principal.
They are guilty of aggressively pushing foreberance and deferment on you, since they make a boatload of money, however, unfortunately, they do not have to follow the same rules as credit card companies do by telling you how much more you’ll be paying.
Even consolidating can be very costly, since they typically spread the payments over 20 years in lieu of the original 10 years. Also, when they advise you to make interest payments while in school to avoid big loans, that is another misnomer, since you’re better off if you have excess money available to make interest payments, you should just borrow less. In the long run, you will save tons by borrowing less.
Student loans are not like car loans. If you are late ever or miss a payment, that interest is capitalized and then you must make interest only payments to catch up. Once I missed 3 payments and it took me 13 months to catch back up, since all of my payments were going to capitalized interest.
It just becomes a dark hole, so no what matter what, keep making the payments on time. Then Sallie Mae can make their gobs of money off of some other poor sucker.
Does anyone know if it’s possible to apply a payment towards a particular loan? In my Sallie Mae account, have a single billing group encompassing 7 loans of varying amounts; I’m wondering if there’s any benefit to knocking any of those specific loans out.
Are they all the same interest rate? If so, the only benefit to knocking one out before the others is to see less loans under the group. If that motivates you then you can go for it. To accomplish this you’ll need to continue paying your minimum payments plus extra principal payments with specific instructions to apply toward that individual loan (the smallest first.)
Julie S.
Is there anyway you could e-mail me the spreadsheet you made, except blank? I read all the comments, but I’m having a hard time visualizing how to setup a spreadsheet using this information. If there is anyway you could send me a blank spreadsheet setup the way you use it, I would greatly appreciate it. Could you title the e-mail loan spreadsheet?
Thank you,
Heather
Hi Heather, I never created a spreadsheet for this calculation, I simply used a calculator and plugged in the numbers. Commentator Julie created a spreadsheet but I never received a copy of it. You should be able to plug in your numbers and find your answer.
Is there any advantage to make multiple payments per month versus only one payment? For example, if my monthly payment is $1,000, should I make a payment of $250 every week instead of one monthly payment of $1,000?
Although it seems like there may be, after running the numbers there is no advantage. I also spoke extensively with my loan provider to ask the question and they confirmed my hunch.
Seems that the way interest is calculated is plain wrong and adverse to students. Wondering if there is any consideration to change the way it is calculated. Seems to me if calculated the same as a mortgage, it would be easier for students.
That I cannot answer. I would say call your loan provider and perhaps your representatives.
remember the calculation is based on the due date. So if you have a due date of October 31 and you pay on October15 the next bill is calculated for interest of 16 days in october and the 30 days in November. Making the bill higher even though they do put the early payments toward your principal the bill is still higher because the bank has to assume you will not pay until the Nov 30 due date. This is a hard lesson
Yep, and remember that no matter when you pay you will always pay the same interest amount because there is 365 days of interest charged regardless of when you send payments. (Late payments not included of course because then fees will be tacked on.)
Thanks to Matt for this subject and all those who added to it. By studying comments here and fully reviewing the Sallie Mae website, I got smart enough to call Sallie Mae and persist when answers were incomplete. There definitely are varying levels of customer service. My 7th call connected with a senior Advocate who had greater access to loan history which solved the dilemma. The senior Advocate clearly had more experience and authority and sent me a hard copy of the full history which was incomplete on the website account. One’s chances of success are greatly improved in knowing what questions to ask and persist until you have clarity. Still, it took 6 weeks from my first call to full resolution.
Way to persist Mike!
I stumbled across your website trying to figure out interest calculations and have a couple questions. I have a Wells Fargo student loan from 2005 (original balance $13,775) and upon review today, my balance has decreased to $11,639. So I started to wonder how in the heck my balance only went down a little over $2,000 in 6 years! I went through my promissory note and while I’m not 100% certain I understand their legal jargon (why can’t they put notes in layman’s terms?) interest isn’t capitalized after the deferment period, just added to the total interest paid. The term length is 180 months regardless of how long I’m in deferment.
I came across your calculation tool and used it to figure how much of my principal is being paid each month. I gathered up all my statements and went from month to month calculating. So please let me know if I’m doing it right… I took the amount of days between my last payment received and current payment received, multiplied by the principal of the loan, multiplied by the interest rate factor. Sometimes I would pay the amounts due within 28 days, sometimes it was 38 days. Should I use a 30 day interest period across the board?
Anyway, my numbers are different from what my statements are saying. It appears that more of my payments should be applied to principal but are going to interest. It is small amounts, maybe $2 here and $5 there, but that can add up over the lifetime of the loan! What I’m worried about is that if this is happening then that means I’m being charged more interest than I should be since my principal isn’t decreasing properly and, my 180th payment could me some exponentially large amount due to these calculations.
Am I looking at this right? Is there something that needs to be done?
Some more information:
I have not had any late fees in the past year.
I am in full repayment.
My interest rate is variable but has been at a steady 9% for the past 18 months.
What am I missing? Thanks.
Hi Sara, the only way to know for sure is to call your loan servicer and work it out with them. It is possible they made a mistake so if you go over the details with their support reps, you will be able to work it out and get the final answer.
Hi,
I recently graduated last year and am in the process of paying off my student loans. I am utterly confused as to why the balance keeps going up instead of going down when I pay my payments on time or before time. I called up Sallie Mae and they say this is due to interest. If anyone can explain the financing procedures that would be much appreciated, thank you.
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