December 11, 2023


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The looming end of the pandemic-era student loan payment and interest suspension has drawn attention to the stark differences between two types of debt: subsidized and unsubsidized loans.

accrued interest is among main difference A loan between federal loans (also known as Stafford loans) to pay for higher education.

How interest is calculated on subsidized and unsubsidized loans

Direct Subsidized Loan Available to undergraduate students with financial need.

They do not accrue interest while the borrower is in school (at least half a day) or during the six-month grace period after leaving school. These loans also do not accrue interest during a payment deferment period, that is, a period when payments are delayed due to unemployment or financial hardship.

In these cases, the U.S. Department of Education pays the interest on the subsidized loans.

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However, this protection does not apply to Direct Unsubsidized Loansavailable to a broader group of borrowers, including graduate students, and not based on financial need.

Interest on an unsubsidized loan starts accruing immediately, and the borrower is responsible for all interest accrued over the period—making this type of debt more expensive than a subsidized loan.

Under certain circumstances, such as after a deferment, unpaid interest on an unsubsidized loan may “capitalWhen this happens, unpaid interest is added to the loan principal balance; future interest is then calculated against the higher principal, increasing future interest payments.

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Borrowers can apply for subsidized and unsubsidized loans, which have different borrowing limits.

About 30.3 million borrowers had subsidized Stafford loans as of March 31, with an average balance of $9,800, according to the Department of Education. According to the Department of Education, about 30.7 million people have unsubsidized loans with an average balance of about $19,000.

(the term stafford loan Refers to the informal method of direct subsidized loans and direct unsubsidized loans made through the direct lending program. It also refers to subsidized or unsubsidized Federal Stafford loans offered through the Federal Family Education Loan (FFEL) program. )

How Payment Suspension, Interest Forgiveness Affects Your Loan

Mark Kantrowitz, a higher education expert, said some financially strapped borrowers may now be wondering whether it might be a good idea to seek a deferment or forbearance after payments resume. But by pursuing those avenues, “you’re actually digging yourself a deeper hole,” Kantrowitz said, because interest typically accrues during the deferment or deferment period.

(There are exceptions, such as subsidized loans being deferred, or loans of either type being deferred due to active cancer treatment.)

Kantrowitz said pursuing an income-driven repayment plan (which limits monthly repayments) is usually a better option for borrowers unless the financial hardship is short-term.

“Generally, if you have the ability to repay the loan, you don’t want to use a deferment or deferment,” he said.