Explain direct student loan interest rates to me...

[Matryoshka]

Dd got offered some of those direct student loans at one school, some subsidized, some unsubsidized.

 

I understand the subsidized ones don't start accruing interest until after graduation, but the unsubsidized ones start accruing while still in school.  I know it makes sense to pay off the interest on the unsubsidized loans while in school so they don't add up.

 

What I'm trying to wrap my head around is that interest accrues daily.

 

So, say you have a $2000 loan at 4.29%.  4.29% of $2000 is $85.80.  So, does the amount one has to pay back get larger by $85.80 a day?  Do you then still pay interest only on the principal or the principal + added interest? 

 

This stuff makes my brain hurt...

Edited March 7, 2016 by Matryoshka

[JanetC]

No, it's an annual interest rate, not a daily one. A portion of that 85.50 accrues daily.

 

Yes, if you don't pay it as it accrues, you owe internet on the interest. So the next year, the loan amount you would owe interest on would be 2085.50.

[FaithManor]

I believe that the direct subsidized ones are the ones in which the interest accrued is paid through the federal government, ie. a type of federal financial aid paid for by taxes. Unsubsidized will accrue unless the parent or student pays the interest each year.

[Matryoshka]

No, it's an annual interest rate, not a daily one. A portion of that 85.50 accrues daily.

 

Yes, if you don't pay it as it accrues, you owe internet on the interest. So the next year, the loan amount you would owe interest on would be 2085.50.

 

But if it's accruing daily and you pay on the principal + interest, wouldn't you end up with more than $2085 to pay at the end of the year, if you didn't pay it off as it was accruing?

 

I saw a tip somewhere on paying off student loans, and it said that since there was daily accrual, you could pay if off much quicker if you paid multiple times per month rather than just once a month (or heaven forbid, yearly) - if you could just wait till the end of the year and the total interest was the same, that strategy wouldn't make sense...

 

How does one figure out how much accrues daily, assuming that starting principal and interest rate?

 

[Carol in Cal.]

You take the interest rate and divide it by 365, and then accrue the balance by that percentage every day.

There are online calculators to do this.

 

Here is an example compounded monthly:

 

Say the interest rate is 24%.  But it compounds monthly.

So the interest rate is 2% per month.

You borrowed 100,000.  At the end of the first month, you owe 1.02 X 100000, or 102,000.  

But at the end of the second month, you owe 1.02 X 102,000, so the interest amount is actually going up each month because you pay interest on the principal, but you also pay interest on the interest accrued to date.  At the end of the year, you owe a lot more than 124,000 because of this.

 

In the case of daily compounding, it's going up each day, by a little bit.

 

HTH.

 

Edited March 7, 2016 by Carol in Cal.

[JanetC]

But if it's accruing daily and you pay on the principal + interest, wouldn't you end up with more than $2085 to pay at the end of the year, if you didn't pay it off as it was accruing?

 

 

Yes, technically, interest on interest is accruing daily. For the numbers you're talking about, the time it would take to make weekly payments instead of annual ones that might save a dollar on that 85 bucks probably isn't with it, though. Most of the interest is accruing on the principal, not on the interest.

 

https://studentaid.ed.gov/sa/types/loans/interest-rates

[RootAnn]

If you want a calculator to help you with how much the 'extra' is, try this one. It says something like 87.66 owed at the end of the year. That comes to $1.86 in interest on the interest for the numbers you gave.