Glossary
Simple Interest
Interest calculated only on the principal balance, never on accumulated interest — the method most federal student loans use daily.
Simple interest is calculated only on the original principal — accumulated interest never joins the base. The formula is linear: interest = principal × rate × time. $10,000 at 5% simple interest earns exactly $500 every year, forever, while the same money at 5% compound interest earns $500 the first year, $525 the second, and accelerates from there.
Where you’ll actually meet simple interest: most US auto loans and federal student loans accrue interest daily on the outstanding principal (balance × rate ÷ 365 per day). Because payments keep clearing the accrued interest, unpaid interest normally never compounds — with one important exception. On student loans, unpaid interest capitalizes (gets added to principal) at defined events like leaving deferment, at which point you begin paying interest on interest after all.
The practical implication of daily simple interest is timing sensitivity: pay a week early and less interest has accrued, so more of your payment hits principal; pay late and the reverse happens. Over a long loan, consistent early payments quietly shave the total.
For any planning purpose, the distinction matters less than people expect — what dominates cost is the rate, the balance, and the loan term.
Related calculators
- Student Loan CalculatorCalculate your monthly student loan payment, total interest, and how much faster extra payments clear the debt. Works for federal and private loans.
- Loan Payoff CalculatorSee when any loan will be paid off and how much interest and time extra payments save you. Works for personal loans, auto loans, and more.