# Calculation on Accrued Interest on typical student loan

I was reading an article on accrued interest as it pertains to student loans, and this is what was said:

"Say you borrow \$5,000 each year you’re in school at an interest rate of 5% each year. Over four years of school and a six-month grace period, \$2,937 in interest accrues."

After reading this quote, I looked for how to calculate accrued interest. How I understood it was that I should calculate the accrued interest per year and multiplied by the duration of school and the six month grace period (which is an equivalent duration of 4.5 years).

Total Accrued Interest = accrued interest per year * 4.5 years = \$1109.58.

My calculated Total Accrued Interest does not match the \$2937 accrued interest stated in the quote.

Can somebody please explain how the \$2937 accrued interest was computed?

• Your total is pretty close for the first loan. Remember that you're borrowing \$5,000 each year. So do the same calculation for 3.5, 2.5, and 1.5 years and add up the totals. Feb 24, 2020 at 14:08

Based on the government website, Student Loans are simple interest instead of compound interest.

I have inspected the source code of the NerdWallet article and found that their Daily Interest assumes 365 days in a year, but the Accumulation over a period assumes 360 days in a year.

With those parameters in mind, here is the calculation: This spreadsheet matches NerdWallet: • Thank you so much for this wonderful response and for taking the time to find out about the parameters assumed by NerdWallet, specifically about the concept of Accumulation. I'd like to clarify two things. 1) You are labeling the last column in your spreadsheet as "Capitalized Interest". Can I assume that for this particular example you are using the phrases "Capitalized Interest" and "Accrued Interest" interchangeably? 2) Is the addition of the "Accrued Interest while in school" to the "Amount you borrowed" knows as capitalization? Feb 24, 2020 at 16:37
• @Diego capitalized interest is when they take the interest that's accrued on your loan and add it to the principal. You would then start paying interest on that interest, because your loan total effectively went up. For student loans, that usually happens when your grace period ends.
– Kat
Feb 24, 2020 at 18:48
• @Diego They are not freely interchangeable but you can call it "Accrued Interest that is Capitalized at the end of deferment". Capitalization means that there would be Interest on the Interest in the future. Feb 25, 2020 at 3:21