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 8 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 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 November 21, 2019, 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 11/21/2019. 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 our student 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 SoFi.
3 Important Disclosures for Figure.
Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
ANNUAL PERCENTAGE RATE (“APR”)
There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.
For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
ELIGIBILITY & ELIGIBLE LOANS
Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).
Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.
All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.
For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.
The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.
The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.
POSTPONING OR REDUCING PAYMENTS
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.
We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.
We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.
If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of November 8, 2019 and is subject to change.
5 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.
6 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 1.76% effective November 10, 2019.
7 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.
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 12/07/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.
8 Important Disclosures for College Ave.
College Ave Disclosures
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1College Ave Refi Education loans are not currently available to residents of Maine.
2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.
4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 12/1/2019. Variable interest rates may increase after consummation.
|1.99% – 6.89%1||Undergrad & Graduate|
|2.31% – 7.36%2||Undergrad & Graduate|
|2.21% – 6.21%3||Undergrad & Graduate|
|1.99% – 6.65%4||Undergrad & Graduate|
|2.43% – 7.60%5||Undergrad & Graduate|
|1.85% – 6.13%6||Undergrad & Graduate|
|1.90% – 8.59%7||Undergrad & Graduate|
|2.74% – 6.25%8||Undergrad & Graduate|