When student debt payments restart, your loan type will make a big difference

imminence end of a break in the age of the pandemic student loan repayments and interest highlights a big difference between two types of debt: subsidized and unsubsidized loans.

Accrued interest is part of primary differences between federal loans – also known as Stafford loans – which are for the cost of higher education.

Subsidized direct loans are offered to undergraduate students who demonstrate financial need.

They do not accrue interest while the borrower is in school (at least half-time) or during a six-month grace period after leaving school. The loans also do not earn interest during deferment, a time when payments are postponed due to unemployment or economic hardship.

The US Department of Education pays interest on subsidized loans in these cases.

However, this protection is not available for Direct unsubsidized loanswhich are available to a wider group of borrowers (including graduate students) and are not based on financial need.

Interest on unsubsidized loans begins to accrue immediately and borrowers are responsible for accrued interest over all periods, making this debt more expensive than subsidized loans.

In some cases — after a deferral, for example — unpaid interest on unsubsidized loans may “capitalize. » When this happens, the unpaid interest is added to the loan principal balance; future interest is then calculated on this higher principal, thus increasing future interest payments.

Borrowers can carry both subsidized and unsubsidized loans, which have different borrowing limits.

About 30.3 million borrowers had subsidized Stafford loans as of March 31, with an average balance of $9,800, according to Department of Education data. About 30.7 million people have an unsubsidized loan, with an average balance of about $19,000, according to the Department of Education.

(The term Stafford Loan is an informal way of referring to subsidized direct loans and unsubsidized direct loans made through the direct loans program. It also refers to Federal Stafford Loans, subsidized or unsubsidized, provided through the Federal Family Education Loans Program, or FFEL.)

The suspension of payment and the waiver of interest been in place for more than three years, since the start of the pandemic in 2020.

During this time, no interest accrued on the loans, which meant that the unsubsidized loans essentially became subsidized debt for some borrowers.

However, interest will begin to accrue on borrowers’ debt again on September 1 and monthly payments will resume in October.

Interest Relief has cost the federal government about $5 billion a month.

Some borrowers in financial difficulty may now wonder if it’s a good idea to continue deferral or forbearance as payments resume, said Mark Kantrowitz, a higher education expert. But “you’re effectively digging yourself into a deeper hole” by pursuing those avenues, Kantrowitz said, because interest will typically accrue during the postponement or forbearance.

(There are exceptions, such as if a subsidized loan is in deferment or if either type of loan is in deferment due to active medical treatment for cancer.)

Pursue a income-based repayment planwhich caps monthly payments, is generally a better option for borrowers unless the financial hardship is short-term in nature, Kantrowitz said.

“Generally you don’t want to use deferment or forbearance if you’re able to repay the loan,” he said.