You’re Losing Money With Unsubsidized Federal Loans – Here’s What You Can Do

If you have federal student loans, do you know if they are subsidized or unsubsidized? Are you unsure?

It’s important to know what type of student loans you have: Direct Subsidized Loans, Direct Unsubsidized Loans, or even a mix of both. That’s because the interest on unsubsidized loans accrues differently than interest on subsidized student loans. This can end up costing you more if you’re not careful.

Knowing if you have unsubsidized or subsidized loans can help you make smarter repayment choices and properly prioritize repayment. You can make the right moves to avoid interest on unsubsidized loans, and get the most benefit out of subsidized loans.

How interest on unsubsidized loans costs more

The main difference between an unsubsidized loan and subsidized loan is how and when each accrues interest. Both types of federal student loans carry the same interest rates for undergraduate students. But interest on unsubsidized loans can cost you more.

The initial interest costs on unsubsidized loans

Repayment of all federal student loans defers automatically until six months after you graduate or are no longer enrolled in college.

During this period, the federal government covers all accrued interest costs for subsidized federal loans. Interest on unsubsidized loans, however, starts accruing right away. And this accrued interest is capitalized (meaning added to your balance) before repayment begins.

By the time you graduate, you could owe significantly more than you borrowed.

Let’s look at an example of two students who each borrow $5,000 a year at 4% to cover college costs, and graduate in four years. One student has access to subsidized student loans, and the other only borrows through unsubsidized student loans.

By maximizing the subsidized student loans available each year, Student B avoids most interest charges. She owes $2,420 less by the time she enters repayment than Student A – despite the fact the each initially borrowed $20,000 in student loans. And because of her higher initial balance, Student A will pay $520 more in student loan interest over 10 years of repayment.

In all, choosing to maximize her subsidized student loans will save Student B $2,940 in interest, compared to Student A.

That’s assuming repayment goes off without a hitch. Subsidized loans can also help you if you need to defer student loans after entering repayment.

Unsubsidized loans accrue interest in deferment

While unsubsidized loans almost always continue to accrue interest, subsidized loans won’t accrue any interest during deferment. This includes deferment after entering repayment, such as unemployment deferment.

Other common reasons for deferment include:

  • Returning to college to earn another degree
  • Unemployment
  • Economic hardship
  • Active duty military service
  • Service in the Peace Corps

If you need to defer student loans for any of the above reasons, unsubsidized student debt will cost you more than subsidized loans.

For instance, let’s say that two years into repayment, both Student A and Student B find themselves unemployed. They choose to defer their student loans to help make ends meet while they search for new jobs.

Here’s how a one-year unemployment will affect each person’s student loan debt:

Student A Student B
Balance after two years of repayment $18,938 $16,928
Balance of unsubsidized loans $18,938 $1,977
Interest accrued $758 $79
Balance after deferment $19,696 $17,007


Once again, Student B’s subsidized loans help her save hundreds by avoiding student loan interest – in this case, $679. Add that to her initial savings, and she’s now $3,619 ahead of Student A on student debt.

The federal student loan interest subsidy will also kick in if you’re on an income-driven repayment plan with payments lower than your monthly interest charges.

How to pay less interest on unsubsidized loans

Overall, unsubsidized student loans will accrue more interest and cost you more than subsidized student loans. Unfortunately, there’s no real way to get around these interest charges.

However, if you have a mix of subsidized and unsubsidized student loans, prioritizing payments can help you avoid or minimize interest payments. And even if you have only unsubsidized student loans, these strategies can still help you get ahead of interest:

1. Find out what types of federal student loans you have

First, you’ll want to make sure you know which loans are subsidized and which aren’t. If you don’t have the information readily available, try contacting your current student loan servicer. You might even be able to find that information yourself if you have an online account with your servicer.

You can also request your financial aid history from the National Student Loan Data System (NSLDS). This report will display a full list of all your student loans and other educational aid, including details about the type of loan and whether it is unsubsidized.

2. Repay unsubsidized loans first

Paying extra on student loans is a smart way to shave years off your repayment period and save hundreds (and potentially thousands) of dollars in interest. If you can sacrifice now to pay extra on your student loans, you’ll definitely get ahead and save.

When you’re deciding which student loans to pay off first, consider prioritizing your unsubsidized student loans over any subsidized loans. Because interest on unsubsidized loans is always accruing, these student loans carry a (slightly) higher risk and cost than subsidized loans. This means that they might be worth targeting and getting rid of before your subsidized loans.

3. Only defer subsidized loans

Should you need to defer student loans at any point, do so strategically and defer only your subsidized student loans. This will pause payments without accruing interest or increasing your balance.

If possible, avoid deferring your unsubsidized loans. Continue repaying these as normal or pay only the interest that accrues each month. This will help you keep up with your balance and avoid slipping further into debt.

4. Look into refinancing unsubsidized student loans

Because subsidized student loans have more protections than unsubsidized student loans, you have more to lose by refinancing these from federal to private student loans.

Unsubsidized student loans, on the other hand, might be a good option to refinance. In return, you could gain a better student loan rate and terms that fit your needs.

Whatever you decide, it’s important to have a plan of attack in place so you can pay down your student loan debt as quickly as possible, which will save you money in the long run.

The article You’re Losing Money With Unsubsidized Federal Loans – Here’s What You Can Do originally appeared on