How compound interest actually adds up
Figures as of · Which rate applies to you is a separate guide — this one is the arithmetic.
Interest on a declining balance
Each period, interest is charged on the balance as it stands right now — the original amount plus any interest already added, minus anything already repaid. That's the "declining balance" method: every repayment shrinks the pot the next period's interest is calculated on. Simple interest, by contrast, would keep charging on the original amount borrowed forever, ignoring what's since been paid off. UK student loans use the declining-balance method.
Two loans with the same original amount and rate can therefore owe different interest if more was repaid off one of them sooner.
One month, worked through
Take an illustrative outstanding balance of £40,000, an illustrative annual rate of 4.1%, and a repayment of £120 that month. One month's interest at that rate adds roughly £134 to the balance. Add that interest, subtract the repayment, and the balance moves to about £40,014 — the figure the following month's interest is then calculated on.
Daily accrual, applied monthly
The Student Loans Company calculates interest daily and adds it to the balance monthly. This site's calculator models that with the monthly rate which, compounded twelve times, reproduces the annual rate exactly — (1 + annual) ^ (1/12) − 1, 0.335% a month here — rather than a straight twelfth (0.342%). The two differ in the third decimal place; what matters is that each month's interest is charged on a balance that already includes the previous months' interest.
Why the balance can grow while you repay
Whether a balance rises or falls in a given period comes down to one comparison: is that period's interest bigger or smaller than that period's repayment? In the example above, if the £120 repayment had been smaller than the £134 of interest added, the balance would have grown that month even though a repayment was made. This is the entire mechanism behind a loan balance that keeps climbing for years despite regular repayments — nothing more unusual is happening than interest outpacing repayment, period after period.
It isn't, by itself, a sign anything has gone wrong. What matters for the outcome is whether the balance clears before the plan's write-off point — see when a loan is written off. A growing headline balance on a loan that's heading for write-off anyway has no cost attached to it, because repayments are set by income, not by the balance.
Interest during a gap in repayment
Interest is charged on whatever the balance is, on a schedule of its own — it does not check whether a repayment landed that month before it runs. Carry the worked example on: after the two months above, the balance sits at around £40,028. Suppose the next 3 months bring no repayment at all — pay below the threshold, a career break, time studying for a postgraduate qualification. Interest still compounds on that balance every one of those months, adding roughly £404 by itself and leaving the balance at about £40,432 once repayments resume — even though nothing was repaid in between.
The same applies moving abroad: interest keeps running whether or not the Student Loans Company has been told and billing has started. A gap in repayment is never a gap in interest — only full repayment or write-off stops it.
What this means for the timing of extra payments
Because interest compounds on the current balance, a pound taken off the balance earlier removes it from every subsequent period's calculation, not just the one it was paid in — the same pound paid later has fewer periods left to have helped. That's the arithmetic reason an early overpayment reduces interest by more than an equivalent later one, for a borrower who's already established they'll clear the balance in full. Whether making one is worthwhile at all — for a balance headed for write-off, it usually isn't — is covered separately in overpay or invest.
See it on your own numbers
The student loan repayment calculator runs this same declining-balance arithmetic month by month against your actual balance, salary and plan, and shows the running total for every year of the loan.