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:
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 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 — 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
- 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 A||Student 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.
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:
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.
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.
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.
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!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 6.65%1||Undergrad & Graduate|
|1.99% – 7.10%2||Undergrad & Graduate|
|2.99% – 6.44%3||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 6.43%4||Undergrad & Graduate|
|3.18% – 6.07%5||Undergrad & Graduate|
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1 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.
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 June 23, 2020. Information and rates are subject to change without notice.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
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 May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
3 Important Disclosures for SoFi.
4 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 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% 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 June 15, 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 6/15/2020. 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 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 0.19% effective June 10, 2020.