**Student Loan Grace Period: Managing Your Finances After Graduation** – If you’ve recently graduated or dropped out of college, you may be wondering how much of your monthly student loan payment goes toward the interest portion of the loan. To understand why this is the case, you must first understand how this interest is accrued and how it is applied to each payment. You can do this by doing the math yourself and digging deep into your student loan balance and payments. To calculate student loan interest, calculate the daily interest rate, then identify the daily interest amount, then convert it to the monthly interest amount. From there, you’ll get a better idea of what you’re paying each month.

Understanding how lenders charge interest for a given billing cycle is actually quite simple. All you have to do is follow these three steps:

## Student Loan Grace Period: Managing Your Finances After Graduation

First, take the annual interest rate on your loan and divide it by 365 to determine the amount of interest that accrues daily.

## You Have A 12 Month Grace Period To Pay Your Federal Student Loans

Let’s say you owe $10,000 on a loan with 5% annual interest. You would divide those 5% rates by 365 to get a daily interest rate of 0.000137: 0.05 ÷ 365 = 0.000137.

Then multiply the daily interest rate by the outstanding principal in step 1. Let’s use the $10,000 example again for this calculation: 0.000137 x $10,000 = $1.37

That $1.37 is the interest assessed to you each day, meaning you are charged $1.37 in interest per day.

Finally, you need to multiply that daily interest by the number of days in your billing cycle. In this case, we’ll assume a 30-day cycle, so you’ll pay $41.10 ($1.37 x 30) in interest for the month. The total for a year would be $493.20.

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Interest begins to accrue as your loan is paid off, unless you have a subsidized federal loan. In this case, you are not charged interest until the end of the grace period, which lasts six months after you leave school.

With unsubsidized loans, you can choose to pay off any interest you accrued while in school. Otherwise, after graduation, the accrued interest is capitalized or added to the principal amount.

If you apply and get a forbearance—essentially a break in your loan payments, usually for about 12 months—keep in mind that while you can stop making payments while you’re out, interest will continue to accrue during that time. . And finally, the principal will be processed. If you experience financial hardship (including unemployment) and defer, interest continues to accrue only if you have an unsubsidized or PLUS loan from the government.

Student loan payments are frozen and interest is set at 0% during the COVID-19 pandemic. That’s still in effect until February 2023, but that could change when the first of two things happens: 60 days have passed since the department implemented the student loan forgiveness plan or the process is resolved; Or 60 days after June 30, 2023.

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The above calculation shows how the interest payments are calculated using what is known as the simple daily interest formula; The US Department of Education does this for federal student loans. With this method, you only pay interest as a percentage of your principal balance.

However, some personal loans use compound interest, which means that the daily interest is not multiplied by the principal amount at the beginning of the billing cycle, but is multiplied by the outstanding principal.

So, on the second day of your billing cycle, you don’t apply the daily interest rate — 0.000137, in our case — to the $10,000 principal you started the month with. Multiply the daily rate by the principal amount plus interest accrued the previous day: $1.37. That works out well for the banks because, as you can imagine, when they combine them in this way, they collect more interest.

The above calculation also assumes a fixed interest rate for the life of the loan, which you have with a federal loan. However, some personal loans come with variable rates that may increase or decrease depending on market conditions. To determine your monthly interest payment for a given month, you must use the current rate you are being charged for the loan.

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