If you have federal student loans, do you know if they are subsidized or unsubsidized? Are you unsure?
It’s important to know what type of student loans you have: Direct Subsidized Loans, Direct Unsubsidized Loans, or even a mix of both. That’s because the interest on unsubsidized 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 help you make smarter repayment choices and properly prioritize repayment. You can make the right moves to avoid interest on unsubsidized loans, and get the most benefit out of subsidized loans.
How interest on unsubsidized loans costs more
The main difference between an unsubsidized loan and subsidized loan is how and when each accrues interest. Both types of federal student loans carry the same interest rates for undergraduate students. But interest on unsubsidized loans can cost you more.
The initial interest costs on unsubsidized loans
Repayment of all federal student loans defers automatically until six months after you graduate or are no longer enrolled in college.
During this period, the federal government covers all accrued interest costs for subsidized federal loans. Interest on unsubsidized loans, however, starts accruing right away. And this accrued interest is capitalized (meaning 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 has access to subsidized student loans, and the other only borrows through unsubsidized student loans.
|Student A||Student B|
|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 – despite the fact the each initially borrowed $20,000 in student loans. And 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. Subsidized loans can also help you if you need to defer student loans after entering repayment.
Unsubsidized loans accrue interest in deferment
While unsubsidized loans almost always continue to accrue interest, subsidized loans won’t accrue any interest during deferment. This includes deferment after entering repayment, such as unemployment deferment.
Other common reasons for deferment include:
- Returning to college to earn another degree
- 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.
For instance, 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.
|Student A||Student B|
|Balance after two years of repayment||$18,938||$16,928|
|Balance of unsubsidized loans||$18,938||$1,977|
|Balance after deferment||$19,696||$17,007|
Once again, Student B’s subsidized loans help her save hundreds by avoiding student loan interest – in this case, $679. Add that to her initial savings, and she’s now $3,619 ahead of Student A on student debt.
The federal student loan interest subsidy will also kick in if you’re on an income-driven repayment plan with payments lower than your monthly interest charges.
How to pay less interest on unsubsidized loans
Overall, unsubsidized student loans will accrue more interest and cost you more than subsidized student loans. Unfortunately, there’s no real way to get around these interest charges.
However, if you have a mix of subsidized and unsubsidized student loans, prioritizing payments can help you avoid or minimize interest payments. And even if you have only unsubsidized student loans, these strategies can still help you get ahead of interest:
1. Find out what types of federal student loans you have
First, you’ll want to 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 sacrifice now to pay extra on your student loans, you’ll definitely 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. Because interest on unsubsidized loans is always accruing, these student loans carry a (slightly) higher risk and cost than subsidized loans. This means that they might be worth targeting and getting rid of before your subsidized loans.
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 these as normal or pay only the interest that accrues each month. This will help you keep up with your balance and avoid slipping further into debt.
4. Look into refinancing unsubsidized student loans
Because subsidized student loans have more protections 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.
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 will save you money in the long run.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
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.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|