Is a Grad PLUS Loan Subsidized or Unsubsidized?
Uncover the definitive status of Grad PLUS loans and learn how to navigate their interest accrual to effectively manage your graduate school financing.
A common question among those pursuing higher education centers on whether a specific loan is subsidized or unsubsidized. This distinction is important for borrowers, as it directly impacts the overall cost of borrowing. This article aims to clarify the nature of Grad PLUS loans within this context.
Understanding Loan Subsidies
Federal student loans are primarily categorized as either subsidized or unsubsidized, a classification that dictates when interest begins to accrue. With a subsidized loan, the government pays the interest that accrues while the borrower is enrolled in school at least half-time, during the grace period after leaving school, and throughout periods of deferment. This structure helps reduce the total amount a borrower repays.
In contrast, interest on an unsubsidized loan begins accruing immediately after the loan is disbursed, regardless of the borrower’s enrollment status or any deferment periods. If this accruing interest is not paid while the borrower is in school or during other non-payment periods, it can be added to the principal balance of the loan, a process known as capitalization. This capitalization increases the total principal amount, leading to interest being charged on a larger sum and potentially increasing the overall cost of the loan over time.
Grad PLUS Loan Structure
Grad PLUS loans are specifically federal unsubsidized student loans available to graduate and professional students. This means that interest begins to accrue from the moment the loan funds are disbursed, even while the student is still enrolled in their program. These loans allow students to borrow up to the full cost of attendance, as determined by their institution, minus any other financial aid received.
Grad PLUS loans carry a fixed interest rate, which is typically higher than that of other federal student loans for graduate students. An origination fee is also deducted from the loan disbursement, typically around 4.228% for loans disbursed after October 1, 2020, meaning the amount received will be less than the amount borrowed. Eligibility for a Grad PLUS loan requires the student to be enrolled at least half-time and to meet general federal student aid requirements, including a credit check to ensure no adverse credit history.
Managing Grad PLUS Loan Interest
Given that Grad PLUS loans are unsubsidized, effectively managing the accruing interest is important to minimize the total repayment amount. One strategy to mitigate capitalization is to make interest-only payments while in school or during any periods of deferment or grace. Even paying a portion of the accruing interest can help reduce the amount that will eventually capitalize.
Borrowers also have access to various federal student loan repayment plans, including Standard, Graduated, and Income-Driven Repayment plans. These options provide flexibility in managing monthly payments, allowing borrowers to choose a plan that aligns with their financial situation and helps control the impact of interest accrual.