- Due to the pandemic, the payment of the student loan and the calculation of interest have been suspended since 2020. They are scheduled to resume in October and September respectively.
- Interest accumulation is a key difference between directly subsidized loans and direct unsubsidized loans.
- The US Department of Education pays interest on subsidized loans in some cases, such as when borrowers are in school or deferring their loan payments. This does not apply to non-subsidized loans.
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The looming end of the pandemic-related pause in student loan payments and interest rates highlights a major difference between two types of debt: subsidized and unsubsidized loans.
Accrual of interest is one of the key differences between federal loans — also known as Stafford loans — intended for the cost of higher education.
Directly subsidized loans are available to undergraduate students who demonstrate financial need.
No interest accrues while the borrower is in school (at least halfway) or during a six-month grace period after graduation. Even during the deferral, a period in which payments are deferred due to unemployment or economic hardship, the loans do not accrue interest.
In these cases, the US Department of Education pays the interest on subsidized loans.
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However, this protection does not apply to direct, unsubsidized loans that are available to a broader group of borrowers (including graduate students) and are not based on financial need.
Interest on unsubsidized loans starts accruing immediately and borrowers are responsible for the accumulated interest in all periods – making this debt more expensive than subsidized loans.
In some cases — for example, after a deferral — unpaid interest on unsubsidized loans can be “capitalized.” In this case, the unpaid interest is added to the principal amount of the loan; Future interest is then calculated on this higher principal, increasing future interest payments.
Borrowers can take out both subsidized and unsubsidized loans, which have different credit limits.
According to the Department of Education, as of March 31, about 30.3 million borrowers had subsidized Stafford Loans, with an average balance of $9,800. According to the Department of Education, about 30.7 million people have an unsubsidized loan with an average outstanding balance of about $19,000.
(The term Stafford loan is an informal term for directly subsidized loans and direct unsubsidized loans made through the Direct Lending Program. It also refers to subsidized or unsubsidized federal Stafford loans made through the Federal Family Education Loan ( FFEL) program.)
The payment pause and interest waiver have been in place for more than three years, since the pandemic began in 2020.
During this time, no loans accrued interest—meaning that unsubsidized loans essentially became subsidized debt for some borrowers.
However, interest on borrowers’ debts will start accruing again from September 1st and monthly payments will resume in October.
The interest waiver cost the federal government about $5 billion a month.
Some struggling borrowers may now be wondering whether it’s a good idea to pursue a deferral or forbearance when resuming payments, said Mark Kantrowitz, a higher education expert. But “you’re effectively digging a deeper hole” by following these paths, Kantrowitz said, since interest is typically accrued during forbearance or forbearance.
(There are exceptions, such as when a subsidized loan is deferred or when one of the loan types is deferred due to active medical treatment for cancer.)
Pursuing an income-related repayment plan that caps monthly payments is generally a better option for borrowers unless the financial difficulties are short-term in nature, Kantrowitz said.
“In general, if you are able to repay the loan, you should not use forbearance or forbearance,” he said.