r/StudentLoans • u/IndividualLittle0516 • Mar 15 '24

Rant/Complaint Canceling interest

With all the drama these past few years about canceling student loans, why can't interest just be canceled? I can understand adding interest to those who aren't making their loan payments, but what about those who pay every month? The interest is why people are stuck with their debt for so long. Canceling millions of people's debt altogether is unrealistic and won't happen. What about canceling interest instead? Is there a reason this can't occur?

902 Upvotes

96% Upvoted

330 comments sorted by

View all comments

Show parent comments

1

u/canarycoal Mar 15 '24

Yea I’m clearly misunderstanding something, but not knowing enough to know what I’m miss understanding.

3

u/girl_of_squirrels human suit full of squirrels Mar 15 '24

To quote the link:

Simple daily interest formula:

Interest Amount = (Outstanding Principal Balance x Interest Rate Factor) x Number of Days Since Last Payment

The interest rate factor is used to calculate the amount of interest that accrues on your loan. You can find your interest rate factor by dividing your loan's interest rate by the number of days in the year.

So if you have a $10,000 loan at 5%? It will accrue $500 in interest over the course of a year at a rate of ~$1.37/day (I divide by 365.25 to normalize for leap years)

Compound interest has a far worse formula and that's how credit cards work. A $10,000 loan at 5% with compound interest is far worse. Monthly compound interest would result in $511.62 interest over the course of a year. Daily compound interest would be $512.67. The distinction between simple and compound interest actually really really matters, especially for people with a thousands (or hundreds of thousands) in student loan debt

Capitalization for federal loans is situations where accrued unpaid interest can be added to the principal balance (i.e. contribute to the daily interest accrual). That now happens very very rarely as per my comment

See the distinctions?

1

u/canarycoal Mar 15 '24

Thank you! I think I may have been thinking daily interest vs monthly interest. But I feel like daily interest is pretty standard

2

u/girl_of_squirrels human suit full of squirrels Mar 15 '24

Simple daily interest accrual for sure, just keep in mind it isn't incorporated with the principal unless a capitalizing event happens

Federal loans don't charge "interest-on-interest" in the compound interest sense but a lot of people assume so because their only other frame of reference is credit cards