Prima is a copywriter at Sallie and Boston University class of 2022 alum with a degree in communications. She transferred schools and switched majors her sophomore year, so she’s familiar with the unpredictable and chaotic college journey. She gives advice based on her own life and helps make the confusing parts of college life a little easier to understand. To wind down, she enjoys cooking, watching thriller shows, and most of the time, just doing nothing.
A subsidized loan is a type of federal student loan that helps first-year college students pay for school. The government pays the interest on the loan while you are at least half-time in school. This saves you money compared to other types of loans where interest starts to build up from the date the loan is disbursed.
But do you have to pay back subsidized loans? Let’s take a closer look at how subsidized student loans work.
What is a Subsidized Loan?
The U.S. government gives loans called “subsidized loans” or “direct subsidized loans.” S. Department of Education to help undergraduate students pay for college. Some key facts about subsidized loans:
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You must demonstrate financial need to qualify. Your school determines eligibility based on your FAFSA results.
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The loan’s interest is paid for by the government while you are at least half-time in school.
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Interest does not accrue during deferment periods.
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You have a 6 month grace period after leaving school before repayment begins.
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Fixed interest rates are typically lower than rates for unsubsidized loans.
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Undergraduate students can borrow up to $5,500 – $12,500 per year, depending on year in school and dependency status.
Do You Have to Pay Back Subsidized Loans?
Yes, you do have to fully repay subsidized loans just like other federal student loans. Here are some key points about repaying subsidized loans:
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Repayment begins 6 months after you graduate, drop below half-time enrollment, or leave school. This is known as the grace period.
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You will have 10-25 years to repay your loan, depending on the repayment plan you choose.
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Your monthly payment amount will depend on your total loan balance and repayment term.
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Interest will accrue during repayment and is added to your balance if unpaid.
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You can prepay or pay extra each month to pay off your loan faster and reduce interest costs.
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If you default, you will face consequences like damaged credit, garnished wages, and loss of eligibility for additional aid.
Repayment Options for Subsidized Loans
You have several options when it comes to repaying your subsidized student loans:
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Standard Repayment Plan: Fixed monthly payments for 10 years.
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Graduated Repayment Plan: Payments start low and increase every 2 years. Term is 10 years.
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Extended Repayment Plan: Fixed or graduated payments for up to 25 years. For loans over $30,000.
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Income-Driven Repayment Plans: Monthly payments based on income. Any balance left after 20-25 years of payments is forgiven.
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Public Service Loan Forgiveness: Forgiveness after 10 years if working full-time for an eligible employer.
Carefully compare the pros and cons of each option before deciding on a repayment strategy. Income-driven plans or Public Service Loan Forgiveness can provide lower monthly payments, but you may pay more interest over time.
Interest Charges on Subsidized Loans
As mentioned earlier, the government pays the interest on subsidized loans during certain periods:
- While enrolled in school at least half-time
- During the 6 month grace period after leaving school
- During eligible periods of deferment
However, during repayment, you become responsible for paying all accrued interest on the loan. Here are some points about interest to keep in mind:
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Interest starts accruing when repayment begins.
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Unpaid interest gets added (capitalized) to your principal balance, increasing your total debt.
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Paying interest during school or the grace period can save you money in the long run.
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You can deduct up to $2,500 in student loan interest from your taxes annually.
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Paying extra each month helps reduce interest costs over the life of your loan.
Ways to Pay Off Subsidized Loans Faster
Here are some tips to help you pay off subsidized student loans more quickly:
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Make payments during the grace period to reduce interest costs.
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Pay a little extra each month to save on interest and shorten your repayment term.
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Target loans with the highest interest rates first when making extra payments.
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Refinance or consolidate loans to get a lower interest rate. Check eligibility requirements first.
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Ask for a raise or pick up a side gig to bring in more money that can be put toward loans.
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Live frugally and cut discretionary expenses so you can allocate more cash to debt repayment.
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Look for student loan forgiveness programs you may qualify for.
Avoid Defaulting on Your Subsidized Loans
It’s extremely important to avoid defaulting on your federal student loans. Consequences of default include:
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Entire loan balance becoming due immediately.
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Damaged credit score and credit report.
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Loss of eligibility for additional federal student aid.
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Garnished wages, withheld tax refunds, and seized federal payments.
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Higher collection costs added to your loan.
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Difficulty qualifying for mortgages, car loans, apartments, and jobs.
If you are struggling to make payments, act quickly to explore alternative repayment plans before defaulting. There are options like deferment, forbearance, and income-driven plans that may help.
Summary
While subsidized loans offer the perk of government-paid interest during school and other periods, you do have full responsibility for repaying the loans. Carefully manage your payments, interest costs, and overall debt to successfully pay off your subsidized student loans. Take advantage of repayment plans, forgiveness programs, and other strategies to make repayment more affordable.
What are subsidized loans?
Subsidized loans are federal loans available to undergraduate students with demonstrated financial need (as determined by the Free Application for Federal Student Aid, or FAFSA®). The main benefit of subsidized loans is that the government pays the interest while you’re enrolled at least part-time, during your grace period, and if you defer the loan. This means your loan balance won’t grow while you’re not actively repaying it, which can save you money in the long run. The government stops paying the interest when you leave school. You have to repay the original amount that you borrowed plus any interest that starts to accrue (grow) from that moment.
- Eligibility: Only available to undergraduate students with financial need.
- Interest: The government covers the interest while you’re in school, during your grace period, and if you defer the loan.
What are unsubsidized loans?
Unsubsidized loans are federal loans available to both undergraduate and graduate students, regardless of financial need. You’re responsible for paying the interest from the moment it’s disbursed (sent to your school), including while you’re in school, during your grace period, and during repayment. When you start paying back your unsubsidized loans, your payments will include the original amount you borrowed and the interest that has accrued.
- Eligibility: Available to both undergraduate and graduate students. No financial need required.
- Interest: You’re responsible for paying the interest as it accrues from the moment the loan is disbursed. Interest will grow during school and grace periods, increasing the total amount you owe.
Do you have to pay back a subsidized loan?
FAQ
Do you pay back subsidized student loans?
You must start paying back your loan after you graduate, leave school, or drop below half-time enrollment. Repayment starts after your six-month grace period has ended.
Is it better to accept subsidized or unsubsidized loans?
Subsidized loans are typically more favorable for borrowers because the government covers the interest during certain periods, making them a more cost-effective option. Unsubsidized loans, on the other hand, require the borrower to pay all accrued interest, resulting in potentially higher repayment amounts.
Are subsidized loans forgiven?
You’ll also be eligible for student loan forgiveness on any remaining balance after the repayment period ends. This is usually after 20–25 years. Both direct subsidized and unsubsidized loans are eligible for any of the four IDR plans.
What happens if I accept a subsidized loan?
If you accept the subsidized loan, you don’t get charged interest on it until 6 months after graduating. You can return the same money from the loan back to them.