What to Do When You’re Losing Money With Unsubsidized Federal Loans

Updated on February 5, 2024

At a Glance

  • Unsubsidized federal loans accrue interest from the moment you take them out, increasing your overall debt.
  • Interest continues to accrue on unsubsidized loans even during deferment periods, which can significantly increase your debt.
  • To minimize interest payments, focus on paying off unsubsidized loans first, defer only subsidized loans, and consider refinancing your loans for a lower interest rate.
  • However, before considering refinancing, remember that you will lose certain federal loan benefits such as income-driven repayment plans and deferment options.

Are you one of the many students who have taken out unsubsidized federal loans to pay for your education? Well, in this case, you might be losing more money than you realize. Unsubsidized loans come with a hidden cost that can really add up over time. 

We’re here to show you some savvy strategies to help you save money and pay off those loans faster. So, let’s explore the world of unsubsidized federal loans!

How Interest on Unsubsidized Loans Costs More

Before we can talk about ways to save money, we need to understand how these unsubsidized loans actually cost you more. The key culprit here is the interest that starts accruing as soon as you take out the loan. While you’re busy cramming for exams and surviving on instant ramen, those unsubsidized loans are quietly stacking up interest.

But let’s delve deeper into the world of unsubsidized loans and explore just how much this interest can impact your financial situation.

The Initial Interest Costs On Unsubsidized Loans

Let’s take a moment to comprehend the sheer magnitude of the initial interest costs. Let’s say that you borrow $10,000 at a moderate interest rate of 5.5%. In just one year, without making any payments, your loan balance will balloon to $10,550. That’s $550 in interest on top of the original amount you borrowed! This means you’ll end up paying more over the life of the loan than you may have anticipated.

Now, imagine the impact of this interest over several years. As time goes by, the interest keeps piling up, increasing the overall amount you owe. It’s like a snowball rolling down a hill, growing bigger and bigger with each passing moment.

Unsubsidized Loans Accrue Interest In Deferment

Even if you’re lucky enough to enjoy a deferment period, those unsubsidized loans won’t give you a break. Nope, they keep on accruing interest, compounding the amount you owe month after month. Before you know it, that mountain of debt starts to feel more like a never-ending rollercoaster ride.

During deferment, you might be focused on building your career or pursuing further education. However, in the background, the interest on your unsubsidized loans is silently growing, adding to your financial burden. It’s like a persistent rain that never stops, slowly eroding away your financial stability.

How to Pay Less Interest on Unsubsidized Loans

Now that we’ve established why these loans can be a money pit, let’s turn our attention to some strategies that can help you save some hard-earned cash. By following these clever tips, you’ll be well on your way to paying off those loans and freeing yourself from the clutches of interest!

1. Find Out What Types of Federal Student Loans You Have

Before you can start tackling your unsubsidized loans head-on, you need to know what you’re dealing with. So take a few minutes to dig into the details of your loan portfolio. Understanding the types of federal student loans you have will allow you to prioritize them accordingly and tackle the ones with the highest interest rates first.

There are also different types of federal student loans? So, you might have a mix of:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • A combination of both 

Each type comes with its own set of rules and interest rates. By taking the time to understand the specifics of your loans, you’ll be better equipped to develop a repayment strategy that minimizes the amount of interest you’ll end up paying.

Furthermore, knowing the details of your loan portfolio can help you identify any potential opportunities for loan forgiveness or income-driven repayment plans. These options can significantly reduce your overall loan burden, so it’s definitely worth exploring!

2. Repay Unsubsidized Loans First

When you’re ready to begin repaying your loans, focus on unsubsidized loans. These loans can devour your hard-earned money with their accruing interest, so it’s best to tackle them first. By paying down the principal balance on your unsubsidized loans early on, you’ll minimize the overall amount of interest you’ll end up paying in the long run.

But how exactly do you prioritize your loan repayments? 

  • Making small subsidized loan payments and larger unsubsidized loan payments – one approach is to allocate a larger portion of your monthly budget towards the unsubsidized loans while making minimum payments on the subsidized ones. This way, you’re actively reducing the principal balance on the loans that are accumulating interest, while fulfilling your obligations on the subsidized loans.
  • Making extra payments – another strategy is to make extra payments whenever possible. By making additional payments towards your unsubsidized loans, you can chip away at the principal balance faster and reduce the overall interest that accrues over time.

3. Only Defer Subsidized Loans

It can be tempting to take advantage of deferment options, especially when life throws you a curveball. But here’s a golden rule: only defer your subsidized loans. Unlike those pesky unsubsidized loans, the government will step in to cover the interest on your subsidized loans during deferment periods.

Deferment can provide temporary relief from making loan payments, but it’s important to remember that interest continues to accrue on unsubsidized loans even during deferment. By deferring only your subsidized loans, you can prevent the interest from piling up and avoid further increasing your loan balance.

It’s worth noting that deferment should be used sparingly and only when absolutely necessary. While it can provide short-term relief, extending the repayment period through deferment can result in higher overall interest costs in the long run. So be mindful of your financial situation and consider other options, such as income-driven repayment plans or loan consolidation, before opting for deferment.

4. Look Into Refinancing Unsubsidized Student Loans

If you’re really serious about slashing those interest costs, it’s worth exploring the option of refinancing your unsubsidized student loans. Refinancing can snag you a lower interest rate, saving you a boatload of money in the long run. Just make sure to do your research, compare lenders, and carefully weigh the pros and cons before taking the plunge.

Refinancing involves replacing your current loans with a new loan from a private lender. This new loan comes with a different interest rate and repayment terms. By refinancing your unsubsidized loans, you may be able to secure a lower interest rate, which can result in significant savings over the life of the loan.

However, it’s important to note that refinancing federal student loans with a private lender means losing out on certain benefits and protections offered by the federal government. These benefits include:

  • Income-driven repayment plans 
  • Loan forgiveness programs
  • Deferment options

So before making a decision, carefully evaluate the trade-offs and consider whether the potential interest savings outweigh the loss of federal loan benefits.

Final Thoughts

Remember that knowledge is power when it comes to tackling those unsubsidized federal loans. By understanding how the interest stacks up and implementing savvy strategies to minimize its impact, you can take control of your financial future and say goodbye to those money-sucking loans.

Frequently Asked Questions (FAQ)

What is an unsubsidized loan?

An unsubsidized loan is a type of federal student loan that accrues interest from the time it is disbursed. The borrower is responsible for paying the interest, which is not covered by the government at any time.

What is the difference between a subsidized and unsubsidized loan?

The main difference between the two is who pays the interest. For subsidized loans, the government pays the interest while you’re in school or during deferment periods. For unsubsidized loans, you are responsible for all the interest that accrues from the time the loan is disbursed.

How does interest accrue on unsubsidized loans?

Interest on unsubsidized loans accrues daily based on the loan’s outstanding principal balance. This means the amount of interest that accrues each day can increase over time as unpaid interest is added to the principal balance.

How can I pay less interest on my unsubsidized loans?

You can pay less interest by making payments on your unsubsidized loans as soon as possible, even while you’re in school or during grace periods. You can also make extra payments or larger payments to reduce your principal balance more quickly.

What happens if I defer my unsubsidized loans?

If you defer your unsubsidized loans, interest will continue to accrue during the deferment period. The accrued interest may be capitalized or added to your principal balance, increasing the amount of your loan and the total cost of borrowing.

Can I refinance my unsubsidized student loans?

Yes, you can refinance your unsubsidized student loans with a private lender. Refinancing can potentially lower your interest rate and reduce your overall loan costs. However, keep in mind that refinancing federal loans with a private lender means you’ll lose federal benefits such as income-driven repayment plans and potential loan forgiveness.

Can I pay off my unsubsidized loans before my subsidized loans?

Yes, you can choose to pay off your unsubsidized loans before your subsidized loans. This is a good strategy to reduce the amount of interest you pay over the life of your loans.

What are some strategies for repaying unsubsidized loans?

Some repayment strategies include making extra payments, prioritizing unsubsidized loans, and refinancing to a lower interest rate. It’s also beneficial to pay the interest on your loans while you’re in school or during grace periods to prevent capitalization.

Do unsubsidized loans affect my credit score?

Yes, like any other loan, unsubsidized student loans do affect your credit score. Making your loan payments on time can help you build good credit. However, late or missed payments can negatively impact your credit score.

What happens if I can’t repay my unsubsidized student loans?

If you can’t repay your unsubsidized student loans, it’s important to reach out to your loan servicer as soon as possible. They can provide information about repayment options, such as income-driven repayment plans or deferment. In some cases, you may also be eligible for loan forgiveness.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.