Who Pays Interest on Unsubsidized Student Loans?

Unsubsidized student loans are a form of federal financial aid available to both undergraduate and graduate students, without requiring a demonstration of financial need. These loans can help cover the costs of higher education, including tuition, fees, and living expenses. This article clarifies the borrower’s obligations regarding interest on unsubsidized student loans.

Interest Accrual on Unsubsidized Loans

Interest on unsubsidized student loans begins accruing immediately after the loan funds are disbursed to the borrower’s school. Interest accumulates from day one, even while the student is enrolled or during periods when payments are not required. The borrower is responsible for paying this accrued interest, which accumulates daily on the outstanding loan balance.

A key distinction exists between unsubsidized and subsidized federal loans regarding interest responsibility. For subsidized loans, the federal government pays the interest that accrues while the student is in school at least half-time, during the grace period, and during periods of deferment. In contrast, with unsubsidized loans, the borrower is responsible for all interest that accrues. This difference means the loan balance on an unsubsidized loan can grow even before repayment begins if interest is not paid.

Interest During Different Loan Statuses

Interest on unsubsidized loans accrues, but the requirement to make payments varies depending on the loan’s status. During the in-school period, interest builds, but borrowers are generally not required to make payments. However, borrowers have the option to pay this accruing interest to potentially reduce the overall cost of their loan.

Following graduation or if enrollment drops below half-time, a grace period typically begins, lasting six months. During this grace period, interest on unsubsidized loans accrues, and the borrower remains responsible for it, even though payments are not yet mandatory. Direct PLUS Loans do not have a grace period but may offer a post-enrollment deferment that mimics one.

Periods of deferment allow for a temporary postponement of loan payments due to specific circumstances, such as re-enrollment in school, unemployment, or economic hardship. For unsubsidized loans, interest accrues during deferment, and the borrower is responsible for this interest. Similarly, forbearance offers a temporary suspension or reduction of payments, but interest on unsubsidized loans accrues, and the borrower is responsible for it during this time.

Consequences of Unpaid Interest

When accrued interest on an unsubsidized loan is not paid, it can be added to the loan’s principal balance through a process known as capitalization. This means the unpaid interest becomes part of the principal, increasing the total. Once interest is capitalized, future interest calculations will be based on this new, larger principal amount, leading to a higher total cost over the life of the loan.

Capitalization typically occurs at specific points in the loan’s lifecycle. Common instances include the end of the grace period, at the conclusion of a deferment or forbearance period (for unsubsidized loans), or when a borrower enters repayment for the first time. For example, if a borrower does not pay the interest that accrues during their in-school period or grace period, that unpaid interest will capitalize when repayment begins. This process can also happen if a borrower exits certain income-driven repayment plans or fails to recertify their income annually. Capitalization means the borrower pays interest on previously accrued interest, which can significantly increase the overall amount repaid and may also lead to higher monthly payments.