Do Unsubsidized Loans Have Interest While in School?
Discover how unsubsidized student loans accrue interest while you're in school and learn effective strategies for managing these costs.
Federal student loans are a common financial resource many individuals use to fund higher education. These loans assist with tuition, fees, and living expenses, making college more accessible. The federal student loan program includes various types, each with distinct terms. This article focuses on unsubsidized loans, explaining their characteristics and how interest functions.
Understanding Unsubsidized Loans
Unsubsidized loans are a type of federal student loan available to both undergraduate and graduate students. Unlike some other federal loan options, eligibility for unsubsidized loans is not based on a borrower’s demonstrated financial need. The amount a student can borrow is determined by their school, considering the cost of attendance and any other financial aid received.
The borrower is responsible for all interest that accrues on unsubsidized loans. Interest begins accumulating from the moment the loan funds are disbursed. This differs from subsidized loans, where the government pays the interest while the student is enrolled in school at least half-time, during the grace period, and during periods of deferment.
Interest Accrual While In School
Unsubsidized loans begin accruing interest immediately upon disbursement, even while the borrower is still enrolled in school. This interest continues to accumulate during the grace period after leaving school and throughout periods of deferment or forbearance. Federal student loans, including unsubsidized ones, use a simple daily interest formula to calculate the amount of interest. This calculation involves multiplying the outstanding principal balance by the interest rate factor, then by the number of days since the last payment. The interest rate factor is derived by dividing the loan’s annual interest rate by the number of days in the year.
If accrued interest is not paid, it can be added to the principal balance of the loan, a process known as capitalization. Capitalization increases the total amount owed, meaning future interest will be calculated on a higher balance. This can significantly increase the overall cost of the loan over its lifetime. For unsubsidized federal loans, interest capitalization occurs when the grace period ends or after a period of deferment.
Handling Accrued Interest
Borrowers with unsubsidized loans have choices regarding how to manage the interest that accrues while they are in school and during other non-payment periods. One option is to make interest payments while still enrolled, even though principal payments are not required. Paying the interest as it accrues can prevent it from capitalizing, which helps keep the total loan balance from growing larger than the original amount borrowed. This strategy can lead to lower overall repayment costs and potentially smaller monthly payments once full repayment begins.
Alternatively, a borrower can choose to allow the interest to accrue without making payments. If interest accrues without payments, it will eventually be capitalized, meaning it is added to the loan’s principal balance. As a result, the borrower will pay interest on the original borrowed amount plus the accrued, unpaid interest. This increases the total amount to be repaid and means a greater portion of future payments will go toward interest rather than reducing the principal.