You’re Losing Money With Unsubsidized Federal Loans — Here’s What You Can Do

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If you have federal student loans, do you know if they are subsidized or unsubsidized? Are you unsure?

It’s important to know the type of federal student loans you have: Direct Subsidized Loans, Direct Unsubsidized Loans, or even a combination of both. That’s because the interest on unsubsidized federal student loans accrues differently than interest on subsidized student loans. This can end up costing you more if you’re not careful.

Knowing if you have unsubsidized or subsidized loans can also help you make smarter repayment choices, avoid unnecessary interest costs, and properly prioritize repayment.

Let’s look at these two issues:

How interest on unsubsidized loans costs more

Both subsidized and unsubsidized federal student loans have interest rates that are fixed each year by the federal government, and that also depend on their disbursement dates. Both loan types also have the same interest rate for undergraduate borrowers; rates for graduate students are higher.

You can compare interest rates for both subsidized and unsubsidized loans on the website for Federal Student Aid, an office of the U.S. Department of Education. Most recently, both subsidized and unsubsidized loans for undergraduates had a fixed interest rate of 4.53%, while the rate for unsubsidized loans for graduate students was 6.08% disbursed on or after July 1, 2019, and Before July 1, 2020.

The initial interest costs on unsubsidized loans

The main difference between an unsubsidized loan and subsidized loan is how and when each accrues interest. However, the interest on unsubsidized loans can cost you more in the end.

Here’s why: Repayment of all federal student loans defers automatically until six months after you graduate or are no longer enrolled in college. During this time, the federal government covers all accrued interest costs for subsidized federal loans. Interest on unsubsidized loans, however, starts accruing right away. Also, this accrued interest is capitalized — which means it’s added to your balance — before repayment begins.

By the time you graduate, you could owe significantly more than you borrowed.

Let’s look at an example of two students who each borrow $5,000 a year at 4% to cover college costs and graduate in four years. One student borrows only with unsubsidized loans, while the second borrows mostly with subsidized student loans.

Student AStudent B
Subsidized loans$0$18,000
Unsubsidized loans$20,000$2,000
Total interest accrued$2,800$380
Balance upon entering repayment$22,800$20,380

By maximizing the subsidized student loans available each year, Student B avoids most interest charges. She owes $2,420 less by the time she enters repayment than Student A — even though both students initially borrowed $20,000 in student loans. Because of her higher initial balance, Student A will pay $520 more in student loan interest over 10 years of repayment.

In all, choosing to maximize her subsidized student loans will save Student B $2,940 in interest compared to Student A.

That’s assuming repayment goes off without a hitch. As you’ll see below, subsidized loans can also help if you need to defer student loans after entering repayment.

Unsubsidized loans accrue interest in deferment

Unlike the case with subsidized loans, you are responsible for paying interest that accrues on unsubsidized loans during deferment, an arrangement in which you’ve received permission to temporarily stop paying back your loan.

Here are reasons why student loan payments are commonly deferred:

  • Returning to college to earn another degree
  • Unemployment
  • Medical emergency
  • Economic hardship
  • Active duty military service
  • Service in the Peace Corps

If you need to defer student loans for any of the above reasons, unsubsidized student debt will cost you more than subsidized loans.

Here’s an example: Let’s say that two years into repayment, both Student A and Student B find themselves unemployed. They choose to defer their student loans to help make ends meet while they search for new jobs.

Here’s how a one-year unemployment might affect each person’s student loan debt:

Student AStudent B
Loan balance after two years of repayment$18,938$16,928
Portion of balance comprised of of unsubsidized loans$18,938$1,977
Interest accrued on unsubsidized loans during deferment$757$79
Total loan balance after deferment$19,695$17,007

Once again, Student B’s subsidized loans helped her avoid sizable interest costs — in this case, $678. Add that to her initial savings of $2,940, and she’s now $3,618 ahead of Student A on student debt repayment.

How to pay less interest on unsubsidized loans

Unfortunately, there’s no real way to completely avoid the higher interest charges that typically come with unsubsidized loans, but there are ways to lessen the load.

For example, you may be able to get a federal student loan interest subsidy for a portion of your interest for some amount of time if you’re on an income-driven repayment plan (REPAYE, PAYE or IBR) and have payments that are lower than your monthly interest charges. Only Direct federal student loans are eligible for these plans. But you must first apply for a income-driven repayment plan through Federal Student Aid to see if you qualify for an interest subsidy.

However, if you have a combination of subsidized and unsubsidized student loans, prioritizing payments by making extra payments on certain loans could help you avoid or minimize interest payments. Prioritize your unsubsidized ones first to reduce your total interest payments.

And even if you have only unsubsidized student loans, the strategies below could help you get ahead of accruing interest:

1. Find out what types of federal student loans you have
2. Repay unsubsidized loans first
3. Only defer subsidized loans
4. Look into refinancing unsubsidized student loans

1. Find out what types of federal student loans you have

Make sure you know which loans are subsidized and which aren’t. If you don’t have the information readily available, try contacting your current student loan servicer. You might even be able to find that information yourself if you have an online account with your servicer.

You can also request your financial aid history from the National Student Loan Data System (NSLDS). This report will display a full list of all your student loans and other educational aid, including details about the type of loan and whether it is unsubsidized.

2. Repay unsubsidized loans first

Paying extra on student loans is a smart way to shave years off your repayment period and save hundreds (and potentially thousands) of dollars in interest. If you can make some sacrifices now to pay extra on your student loans, you’ll likely get ahead and save.

When you’re deciding which student loans to pay off first, consider prioritizing your unsubsidized student loans over any subsidized loans. Again, interest on unsubsidized loans is always accruing, which means these student loans carry higher costs and therefore more financial risk.

3. Only defer subsidized loans

Should you need to defer student loans at any point, do so strategically and defer only your subsidized student loans. This will pause payments without accruing interest or increasing your balance.

If possible, avoid deferring your unsubsidized loans. Continue repaying them as you normally do, or at least pay only the interest that accrues each month. This will help you keep up with your balance and avoid slipping further into debt. To see what deferment might cost you with time, check this deferment calculator.

4. Look into refinancing unsubsidized student loans

Because subsidized student loans are less financially risky than unsubsidized student loans, you have more to lose by refinancing these from federal to private student loans.

Unsubsidized student loans, on the other hand, might be a good option to refinance. In return, you could gain a better student loan rate and terms that fit your needs. Check this refinancing calculator and these refinancing options to see if this is your best way to go.

Whatever you decide, it’s important to have a plan of attack in place so you can pay down your student loan debt as quickly as possible, which could save you money in the long run.

Katie Gustafson contributed to this report.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.89% – 6.66%1Undergrad
& Graduate

Visit Splash

1.89% – 5.90%2Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.09%3Undergrad
& Graduate

Visit SoFi

1.99% – 5.34%4Undergrad
& Graduate

Visit Earnest

1.97% – 8.54%5Undergrad
& Graduate

Visit Lendkey

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.


2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of December 1, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


5 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.