Calculation of the one percent interest payable by the student

When a student draws down student loan and signs the loan agreement, he or she commits to complying with the terms and conditions of the student loan given in the loan agreement. According to the terms and conditions of the loan agreement, the share of the interest paid during the time the student receives student financial aid is the interest calculated in euros for the interest period at the time of invoicing divided by the prevailing interest rate percentage at the time of invoicing.

For example: if the amount of interest falling due for six months is 300 euros and the interest rate percentage at the time of invoicing is 1.75%, the share of the interest payable by the student is: 

• the amount of interest divided by the interest rate percentage
• 300 euros / 1.75 = 171.43 euros

Using this method of calculation may cause the interest payable by the student to rise surprisingly high in a situation where the interest rate percentage at the beginning of an interest period is higher than at the end of the period. However, the share of the interest payable by the student is correspondingly smaller when the total interest rises during an interest period.

A more detailed description of the bases for the method of calculation can be found at the end of this page. 

 

Capitalisation of interests 

The interests are capitalised during the terms the student receives financial aid and during one term after the last term of student financial aid. When the interest is capitalised, the borrower can, if he or she wants, pay that share of the interests by paying an additional instalment.

As a result of the capitalisation, the repayable principal also increases by the amount of the interest and the compound interest. Bank does the capitalisation without a separate request and notifies the borrower of it. The capitalised interests are tax-deductible.

During the capitalisation period, ie during the time the student receives financial aid, the borrower pays a one percent share of interest to the bank. The remaining share of the interest payable on the student loan is capitalised. However, if the share of the interest payable by the borrower is less than 15 euros, the entire interest will be added to the loan principal.

 

If the borrower leaves the interest unpaid, Kela may have to repay the student loan to the bank in its capacity as guarantor. After this a student cannot be granted a new student loan. If Kela has to repay the loan to the bank, it will collect its receivables from the borrower with an eight percent interest (as of 1 January 2010 the interest rate applied will be 7%). The amount of the interest is stated in the Decree on Student Financial Aid. If necessary, the amount to be collected will be recovered through execution.

 

Detailed description of the bases for the method of calculation 

The formula applied to calculating the one percent portion of the interest payable by the student during the time he or she receives student financial aid is based on the amount of one percent of the total interest rate. The amount of interest payable by the student equals this share of the total interest: 

• the one percent share of the total interest rate (K) = 1% / K%
• the amount of interest paid by the student = total amount of interest (R) x 1 / K

 As the “total amount of interest” in the formula given above is only multiplied by “one”, the formula can be shortened to the form “the total amount of interest (R)“ divided by “the total interest rate”, ie: 

• the share of the interest paid by the student = R / K

In this way it complies with the condition in the loan agreement; the one percent share of the interest paid by the student is the interest calculated for the interest period at the time of invoicing (R) divided by the prevailing interest rate at the time of invoicing (K).

 

In other words, the amount of interest payable by the student = “the total interest amount due for the interest period” x “one percent” / “the prevailing total interest rate at the time of invoicing”.

Example 

• the total amount of interest due for the interest period (eg six months) = 300 euros
• the prevailing total interest rate at the time of invoicing (eg 30 November) = 1.75%
• the one percent share of the total interest rate at the time of invoicing = 1% / 1.75% = 0.57
• the one percent share of the interest paid by the student
  = 300 euros x 0.57 = 171.43 euros
• the remaining portion of the interest is capitalised, ie added to the principal of the student loan = 300 euros - 171.43 euros = 128.57 euros

 And a corresponding example with a “shortened” formula 

• the interest calculated for the interest period at the time of invoicing (R), ie the total interest amount = 300 euros
• the prevailing interest rate at the time of invoicing (K), ie the total interest rate = 1.75%
• the portion of one percent of the interest paid by the student = R / K
  = 300 euros / 1.75 = 171.43 euros