Can You Pay Subsidized Loans While in School?
Learn if you can pay your subsidized student loans while still in school and why it might be a smart financial move. Understand the process.
Federal student loans provide financial support for higher education. Understanding their terms and conditions is important for managing educational finances. Navigating loan types and repayment options helps borrowers make informed decisions throughout their academic journey.
Understanding Subsidized Loans
A Direct Subsidized Loan is a federal student loan for undergraduate students who demonstrate financial need. The U.S. Department of Education pays the interest that accrues while the borrower is enrolled in school at least half-time. This benefit also extends during the loan’s grace period and during periods of deferment.
This means interest does not accumulate on the loan balance during these periods. The principal amount remains the same, preventing the loan from growing larger due to interest charges. This feature distinguishes subsidized loans from unsubsidized loans, where interest accrues from disbursement.
Making Payments During Enrollment
Borrowers are permitted to make payments on their Direct Subsidized Loans even while they are still enrolled in school, even though interest does not accrue during this period. Making payments during enrollment can be a financially strategic decision. Any payments made will be applied directly to the loan’s principal balance, as there is no accrued interest to cover.
Reducing the principal balance early can lead to substantial savings over the life of the loan. A lower principal means less interest will accrue once repayment begins after the grace period ends. This proactive approach can also result in lower monthly payment amounts, providing greater financial flexibility.
Payment Application and Loan Servicing
When a payment is made on a federal student loan, funds are typically applied in a specific order: first to any outstanding fees, then to accrued interest, and finally the principal balance. For Direct Subsidized Loans while in school, payments go directly toward reducing the principal, as no interest has accrued. This ensures every dollar paid diminishes the amount originally borrowed.
To make a payment, borrowers must identify their loan servicer, the company assigned to manage their loan account. Servicer information is available through the Federal Student Aid website. Payments can be made through the servicer’s online portal, by mail, or over the phone, with options for one-time or recurring payments.
What Happens After School
After a borrower graduates, leaves school, or drops below half-time enrollment, their Direct Subsidized Loan typically enters a grace period, usually lasting six months. During this time, the U.S. Department of Education continues to pay the interest, meaning interest does not accrue on the loan.
Once the grace period concludes, interest begins to accrue on the outstanding principal balance. Regular monthly payments become due, and the borrower enters the active repayment phase, becoming fully responsible for both principal and accruing interest.