The Daily Interest Accrual Formula
Federal student loan interest accrues daily using: Interest per day = Loan Balance × (Annual Interest Rate ÷ 365). On a $35,000 loan at 6.5%: interest per day = $35,000 × (0.065 / 365) = $6.23/day. Monthly accrual: $6.23 × 30 = $186.90/month. Monthly payment of $397 on a 10-year plan: $186.90 to interest, $210.10 to principal.
A $35,000 loan at 6.5% in a 12-month deferment: interest accrues at $186.90/month. After 12 months: $35,000 + $2,243 = $37,243 new balance. None of this accrued interest was paid — it capitalizes (adds to principal) at deferment end. You now owe $37,243 and interest is calculated on this higher balance going forward.
Interest Capitalization: When Accrued Interest Becomes Principal
Capitalization is when unpaid accrued interest is added to the principal balance. This happens at: end of deferment, end of forbearance, when leaving income-driven repayment, and when making loan payments without covering all accrued interest. After capitalization, interest accrues on the higher principal — compounding your debt.
Interest capitalization scenarios during non-repayment periods
| Scenario | Starting Balance | Monthly Accrual | After 12 Months (No Payment) | After Capitalization |
|---|---|---|---|---|
| Deferment ($35K, 6.5%) | $35,000 | $186.90 | $37,243 | $37,243 new balance |
| Forbearance ($50K, 5.05%) | $50,000 | $210.42 | $52,525 | $52,525 new balance |
| IDR below interest ($80K, 6.5%) | $80,000 | $433 | Balance grows if payment <$433 | Capitalization on exit |
The SAVE Plan’s Interest Subsidy
SAVE has a unique provision: if your payment doesn’t cover the monthly interest accrual, the government covers the difference. This prevents negative amortization — your balance won’t grow even if your payment is below the interest. This is the most significant improvement over prior IDR plans.
See How Your Balance Will Change Over Time
Enter your balance and repayment plan — see exactly how principal and interest split each month.