Student loans have a giant drawback: interest charges. One way to offset these interest charges, however, is to take out a subsidized student loan. With a subsidized student loan, you pay less interest on the loans you take out for school.
If you’re a student earning an advanced degree, you might be wondering if a subsidized student loan could be an option for you. Here’s what you need to know.
What is a subsidized student loan?
With subsidized federal student loans, the Department of Education pays your interest charges in certain situations. That means you pay less for the student debt you take on.
But the federal student loan interest subsidy is available only on certain loans and applies only at certain times — usually while the student is in school or if they defer the subsidized student loan in repayment.
Currently, the Department of Education offers just one type of subsidized student loan. These loans, called Direct Subsidized Loans, are extended to undergraduate students who have demonstrated financial need.
There is no subsidized student loan for graduate school
Unfortunately, the Federal Student Aid Office no longer offers a subsidized student loan option to graduate students.
It did offer a couple of subsidized student loans for students earning an advanced degree in the past, however:
- Subsidized Stafford Loans for graduate students: Also called Direct Loans, these Subsidized Stafford Loans were offered to graduate students who demonstrated financial need until July 2012. Then they were cut to free up funding for other forms of federal student aid.
- Federal Perkins Loans: The Federal Perkins Loan Program created funds that allowed colleges to offer additional loans to low-income students. Federal Perkins Loans came with a federal interest subsidy and were available to both undergraduate and graduate students. Unfortunately, the Federal Perkins Loan Program expired in 2017 and wasn’t renewed by Congress, so this subsidized student loan option is no longer available.
4 ways to save on interest (besides subsidized student loans)
Borrowing with a subsidized student loan is a strategy you can’t use as a graduate student.
However, a federal student loan subsidy isn’t the only way to pay less interest on educational debt. Here are a few ways you can lower your costs when borrowing for an advanced degree.
1. Use low-interest federal student loans first
Graduate students can take advantage of two types of federal student loans: Direct Unsubsidized Loans for graduate and professional students and Grad PLUS Loans.
|Direct Unsubsidized Loans for graduate and professional students||Grad PLUS Loans|
|Annual loan limit||$20,500||Up to cost of attendance after other financial aid is applied|
|Loan fees on $20,000||$213||$853|
|Interest charges on $20,000||$9,091||$10,711|
|Total borrowing costs on $20,000||$9,304||$11,564|
As the table shows, one grad school loan option is significantly more affordable than the other.
Direct Unsubsidized Loans have lower interest rates and loan fees. For a grad student attending a two-year program and borrowing $10,000 per year, choosing Direct Unsubsidized Loans saves $2,260 over the life of their student loans.
Grad PLUS Loans, on the other hand, allow a student to borrow more than $20,500 a year, up to their program’s cost of attendance. But it’s a good idea for grad students to borrow the max amount possible through Direct Unsubsidized Loans before turning to Grad PLUS Loans to finance their studies.
2. See if you can get a lower interest rate with private student loans
Many graduate students turn to private student loans to beat Grad PLUS Loans. If you have good or excellent credit (or a cosigner who does), you likely can get a lower interest rate with private student loans.
Shop around for private student loans to see which ones offer good rates. You can get quotes on private student loan rates from lenders that use a soft credit check. They’ll give you customized private student loan offers you can compare to Grad PLUS Loans — without dinging your credit.
3. Pay off grad school loans early
Another way to reduce interest charges on grad school loans is to prepay your student debt. In other words, pay more than the required amount on your student loans each month.
While you’re in school, that could mean making small payments on deferred student loans. Once your debt enters repayment, you might want to pay extra each month to get ahead of interest charges.
By paying more than you’re required to each month, you’ll pay off your debt faster — and pay less in interest in the process. Our student loan prepayment calculator can show you your potential savings.
4. Refinance once you’re in repayment
Even if you don’t have great credit or can’t qualify for low private student loan rates right now, you can keep this option in mind. You can get a better rate if you refinance your student loans once you have your advanced degree and land a high-paying job.
Refinancing your student loans after graduation can save you tens of thousands of dollars in interest over the life of your debt. You can use the best option to pay for grad school now, whether that’s federal or private student loans. After you graduate, consider refinancing your student loans to see if you could lower your costs and pay less.
While getting a subsidized student loan isn’t an option for graduate students, there are plenty of alternatives to pay for grad school. If you shop around, compare your options, and keep refinancing in mind, you can pay less in student loan interest.
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