Do Subsidized or Unsubsidized Loans Accrue Interest?
Learn the crucial differences in interest accrual for federal subsidized and unsubsidized student loans to make informed financial choices.
Student loan interest represents the cost of borrowing money for educational expenses. Understanding how interest applies to different loan types is important for managing overall debt and making informed financial decisions.
Understanding Federal Student Loans
Federal student loans are a common way to finance higher education, with two primary types: subsidized and unsubsidized loans. Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. For these loans, the government pays the interest under specific circumstances, which can reduce the borrower’s total cost.
Direct Unsubsidized Loans are available to both undergraduate and graduate students regardless of financial need. With unsubsidized loans, the borrower is responsible for all accrued interest from the moment the loan is disbursed. Both loan types offer federal protections and benefits, but the key distinction lies in who is responsible for the interest during certain periods.
Interest Accrual on Subsidized Loans
Interest on Direct Subsidized Loans does not accrue while the student is enrolled in school at least half-time, during a six-month grace period after leaving school, or during periods of deferment. The government covers interest during these periods. This helps keep the principal loan balance unchanged.
Interest on subsidized loans begins to accrue once the grace period ends and repayment begins. It also starts accruing if a student drops below half-time enrollment. If a borrower enters forbearance on a subsidized loan, interest will accrue during that period, and the borrower will be responsible for it.
Interest Accrual on Unsubsidized Loans
Interest begins to accrue on Direct Unsubsidized Loans immediately after the loan is disbursed, regardless of the student’s enrollment status.
Interest accrues while the student is in school, during the six-month grace period after leaving school, and throughout any periods of deferment or forbearance. The borrower is responsible for all accumulated interest. The loan balance grows as interest adds up daily, even if payments are not required during these periods.
What Happens to Accrued Interest
Capitalization occurs when accrued interest is added to the principal balance of the loan. This increases the total amount owed, and future interest then calculates on this new, larger principal, potentially increasing the total cost of the loan over its lifetime.
For unsubsidized loans, capitalization typically happens when the loan enters repayment after periods like in-school status, grace periods, or the end of deferment or forbearance. For subsidized loans, capitalization usually occurs after a period of forbearance or if the loan leaves an income-driven repayment plan under certain conditions. Borrowers can minimize the impact of capitalization by making interest payments while in school or during periods of non-payment, even if not required.