Subsidized vs. Unsubsidized Student Loans: Repayment for Each Type

With current college costs, many students turn to federal student aid to earn their degree.The majority of those students receive help through student loans under the federal Direct Loan program.If you’re in grad school or recently graduated with an advanced degree, you might’ve taken on federal loan debt during your undergraduate studies.But do you know if you have subsidized versus unsubsidized student loans? Figuring out what loan type you have is important before you plan your repayment strategy.

What is the difference between subsidized and unsubsidized loans? Student loan interest on subsidized versus unsubsidized student loans is handled differently, which affects the way you’ll repay your loan debt.What is a subsidized student loan? Federal Direct Subsidized Loans are loans for undergraduate students who show a financial need.Students must complete the Free Application for Student Aid (FAFSA) to be eligible for Direct Subsidized Loans.Your school determines your financial need based on the information you provide on the FAFSA using the Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC), and other financial factors.

It ultimately determines the maximum amount you can borrow within certain annual loan limits.The government sets the interest rate on these student loans, and they are relatively low compared to private student loans.The U.S.Department of Education pays the interest on this type of federal student loan while you're in school.

This means you’re not charged interest during this time.You must be enrolled at least half-time, and the grace period when you don’t pay interest after leaving school is six months.This rule is also in place during periods of deferment.What is an unsubsidized student loan? A federal Direct Unsubsidized Loan is available for undergraduate and graduate students.

Unsubsidized loans also require students to complete the FAFSA, but they’re not based on financial need.Schools determine how much aid students receive.These decisions are based on the cost of attendance and other financial aid received.Interest for federal Direct Unsubsidized Loans accrue as soon as funds are disbursed.

This includes while you’re in school and into the six-month grace period after leaving school.Interest on subsidized vs.unsubsidized student loans Since interest is handled differently for subsidized versus unsubsidized student loans, it’s smart to think about how to strategically lower your interest charges overall.With the government footing the interest on subsidized student loans while you’re in school, it’s your federal Direct Unsubsidized Loan interest that’ll cost you more money.

As you’re completely responsible for interest on your loan, you have a couple of choices: Pay the interest while you’re in school Start paying interest after you’re out of school If you decide not to pay the interest while you're in school, it will continue to accrue.In many cases, that unpaid interest won't capitalize immediately because federal rules now limit when interest can be added to your principal balance.However, capitalization can still occur in certain situations, such as after some periods of deferment or when leaving specific repayment plans.When capitalization does occur, you'll begin paying interest on a larger loan balance.

Here's an example: Let’s say you have $15,000 in Direct Unsubsidized Loans from grad school.You also didn’t pay any interest during your six-month grace period.With a 6.6% fixed rate, the amount of interest that accrues on your loan per day is $2.71.Your loan will accrue interest totaling approximately $495.

If that $495 of unpaid interest is later capitalized because of a qualifying event (e.g., voluntarily leaving certain income-driven repayment plans), your principal balance would increase to $15,495.Future interest would then be calculated on that higher balance, increasing your daily interest from about $2.71 to about $2.80.Repayment strategies for grad students: Subsidized vs.unsubsidized student loans Now that we’ve covered the difference between subsidized and unsubsidized student loans, what's the best way to tackle repaying these student loans? Here are a few strategies to keep in mind as you come up with a plan for repaying your subsidized and unsubsidized student loan debt: 20% rule.

Interest accrues on unsubsidized loans from the start.If you aren’t making interest payments while in school, plan to repay 20% above what you originally borrowed.Pay it forward.Avoid having your interest accrue and potentially capitalize by making interest payments while you’re in school.

Whether this is a good idea for your situation depends on your repayment strategy (more on that later).Take what you need.You don’t get to choose how much financial aid you'll be awarded.But you can control how much you actually borrow.

Only borrow what you need for school costs, loan fees and supplies.Just because you can max out high aggregate loan limits doesn't mean you should.What options do you have for repaying your subsidized and unsubsidized loans? The good news is both types of loans offer several solutions for repayment.Which plan is right will depend on your specific situation and your repayment goals.

Income-driven repayment (IDR) plans Both subsidized and unsubsidized loans allow you to take advantage of IDR plans.This is an excellent way to lower your monthly student loan payment as each plan is based on your income and family size rather than how much you owe.Depending on when you borrowed your loans and your eligibility, available repayment plans may include: Income-Based Repayment (IBR) Repayment Assistance Plan (RAP) Pay As You Earn (PAYE) Income-Contingent Repayment (ICR) In the end, if you aren’t pursuing loan forgiveness, you will pay more with an IDR plan.But if you need lower payments now, this is an option.

Public Service Loan Forgiveness (PSLF) Another perk subsidized and unsubsidized student loans offer is access to PSLF.With PSLF, any student loan debt remaining after 120 qualifying payments is forgiven tax-free.The Department of Education now fully manages the PSLF program, including tracking qualifying employment via the PSLF Tracker.We recommend submitting the PSLF form at least annually to help ensure your progress is documented.

PSLF forgiveness could be huge if you have unsubsidized grad school loans to pay off.Income-driven loan forgiveness If you aren’t planning on working in the public sector or don’t qualify for PSLF, another possibly beneficial option is IDR loan forgiveness.After signing up for an eligible IDR plan and making payments for 20 to 30 years, any remaining student loan debt is forgiven.However, any forgiven debt with IDR loan forgiveness in 2026 or later is considered taxable income at the federal level.

So, you could face hefty tax implications.Be sure to factor this in when deciding on a repayment plan for your student loan debt.Refinance your federal Direct Unsubsidized Loans If you have a large amount of unsubsidized student loan debt, you may be better off refinancing your student loans.You may be able to lower your interest rate or get better repayment terms.

But this depends on whether you have excellent credit and other eligibility requirements.Regardless of whether you have subsidized versus unsubsidized student loans, there’s a repayment strategy that’s right for you.If you need help figuring out the best path, we love making custom repayment plans for readers like you.