The Department of Education uses the simple daily interest formula to calculate interest on federal student loans. Interest is charged as a percentage of the loan’s principal balance.
Private loans sometimes use compound interest. With compound interest, the daily interest is applied to the principal balance and any unpaid, accumulated interest. While borrowers only pay interest on the principal for simple interest loans, they pay interest on the principal plus accrued interest for compound interest loans.
If you’re paying simple interest on your loans and making principal payments, each month, the interest will be applied to a lower principal amount, which means you'll be charged less in interest each month. If you’re paying compound interest, interest will keep accruing and even increase your loan balance if your monthly payments don’t cover the interest.