Student loans can be useful to complete your higher education. Many financial institutions nowadays offer curated student loans. However, it is essential to check how the interest on these loans affects one’s financial health. If you’re a student or recent graduate, understanding how interest works on your loan is one of the important steps toward managing your debt wisely. This beginner-friendly guide breaks down how student loan interest is calculated, when it starts increasing, and what you can do to manage it.
What is Student Loan Interest?
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Student loan interest is the additional amount you pay in exchange for taking out a loan for your education. The amount is charged as a percent of the loan and is added to the overall amount you need to pay. Interest is charged by the lender when it gives you capital in a loan.
How is Student Loan Interest Calculated?
Interest on a student loan is typically simple interest, not compound interest. Here’s how it’s calculated:
Daily Interest Formula:
Interest = (Loan Balance × Interest Rate) ÷ Number of Days in the Year
For example, if you have a loan of ₹2,00,000 with an annual interest rate of 6%, your daily interest is:
₹2,00,000 × 0.06 ÷ 365 = ₹32.88 per day
This interest continues to accrue every day until you start repaying the loan.
Types of Education Loan Interest Rates
When it comes to student loans, lenders usually offer two kinds of interest rate structures: fixed and floating.
Fixed Interest Rates
The interest rate does not change at all from the start to the end of the loan. Since there isn’t a change in the rate, the EMI stays the same each month, helping you keep your budget on track.
Floating Interest Rates
Floating rates are based on the Reserve Bank of India’s (RBI) repo rate and related market moments. Interest rates may increase or decrease depending on the state of the market. If the benchmark rate goes up, the interest rate you’re charged and your payment per month will increase as well.
What Influences Student Loan Interest Rates?
Several elements affect the rate you’re offered on your education loan. These include:
- Lender’s Internal Policies: Different banks and NBFCs follow their guidelines within the framework laid down by the RBI. Some may offer special rates for certain universities, courses, or students with excellent academic records.
- Loan Amount: Typically, larger loan amounts could come with slightly higher rates, as lenders take on more risk.
- Co-Applicant’s Creditworthiness: Having a co-borrower with a strong credit profile (like a parent or guardian) may help you qualify for lower interest rates.
- Economic Environment: Interest rates are also affected by broader economic indicators such as inflation and policy changes set by financial regulators.
How to Minimise Student Loan Interest
The following are some effective strategies to minimise your student loan interest.
1. Make Interest-Only Payments Early
Many education loans allow you to postpone paying the main loan amount until you complete your education. Starting to repay only the interest rate in college, if it’s around ₹500–₹1,000 per month, will ensure you aren’t charged more interest when you graduate. This could make your loan payments less once you finish your studies.
2. Pay More Than the Minimum Amount
Once your repayment period begins, try to pay more than the required monthly EMI. Any extra capital you pay is directly applied to the principal balance, which reduces the amount on which future interest is calculated. For example, if your monthly EMI is ₹5,000 and you pay ₹6,000, the extra ₹1,000 helps lower your loan faster, potentially saving you thousands in interest over the years.
3. Pay Early and Often
Interest on some student loans accumulates daily. That means the sooner you make a payment, the less time interest has to grow. Even if your EMI is due on the 10th of the month, making a payment on the 5th can slightly reduce your interest for that month. Additionally, consider making biweekly payments instead of monthly ones. This results in 26 half-payments a year (equal to 13 full payments), helping you pay off your loan faster and reducing interest charges.
4. Look for Lower Interest Rates
Your interest rate greatly impacts the total amount you repay on your education loan. Before choosing a loan, use an education loan app to compare offers from different banks, NBFCs, and government-backed schemes easily. Many lenders provide offers such as:
- Discounts for auto-debit enrollment
- Lower rates for female students or students of premier institutes
- Reduced rates for good academic performance
Later, once you’ve started repayment and built a good credit history, consider refinancing or balance transfer options to move your loan to a lender offering a lower rate. Even a 1% reduction can lead to considerable savings over time.
Conclusion
Understanding how student loan interest works is the first step toward smart borrowing and responsible repayment. From knowing how interest is calculated to choosing between fixed or floating rates, each decision affects how much you’ll end up paying. There are ways to reduce interest costs, like paying early, paying extra, or choosing the right repayment plan. By staying informed and planning, you can properly manage your education loan and avoid unnecessary financial stress in the future.