4 Things You May Not Know About Interest

Interest can cause a ton of confusion.  I even once had an email from someone who stated “interest as you know is to be collected and not ever paid.”  Here is some common things borrower’s do not know about interest.

1) The government pays your interest while in school, but not on all your loans

If you have unsubsidized loans the interest is the responsibility of the borrower from the day the loan is disbursed.  If you have subsidized loans that were disbursed on or after July 1, 2012 and before July 1, 2014 the government will cover your interest while you are in school but will not for your grace period.  If you have subsidized loans that were disbursed before July 1, 2012 or on or after July 1, 2014 the government will cover your interest the entire time you are in school.  Interest that does accrue is not required to be paid while you are not in repayment but is to your benefit.

2) Interest accrues daily

To figure out interest you multiply your principal balance by the interest rate and then divide this number by 365.  This gives you your daily interest rate.  Whenever you make a payment that causes your principal to go down, your daily interest is recalculated.

3) Interest is only added to the principal in certain circumstances

At the end of a forbearance, deferment, or grace period any interest on your account will be added to the principal and make your future daily interest higher.  Otherwise in any situations where your interest does not capitalize it will accrue separately from your principal.

4) You have to satisfy interest before you can pay principal

When you make a payment the interest is satisfied first and then after the interest is satisfied the remaining goes to principal.  With the exception of a borrower cancellation payment, there is no way for your payment to go straight to principal and the interest must be satisfied.