Interest Subsidies for Federal Student Loans
There are a few types of interest subsidies available to federal student loan borrowers. Are you using the programs that are available to you?
While in School or Deferment
Your student loans are always accruing interest, even when you’re still in school. The interest accruing on Subsidized Loans is paid by the government while you’re in school or in deferment, making them an attractive option for borrowers.
A subsidy limit is time-based and varies by program; typically it is 150% of the published program length. For example, a typical 4-year Bachelor’s program has a subsidy limit of 6 years. After this time has passed, the government stops paying the accruing interest on your Subsidized Loans.
There are a few situations to be mindful of where you can lose your subsidized benefit on your subsidized loans:
- You reach the subsidy limit and are still enrolled in the program.
- You reach the subsidy limit, didn't graduate, and transfer to an undergraduate program that's the same length or shorter than your prior program.
- You transfer into a shorter program and lose eligibility for Direct subsidized loans because you already received them for a period that is equal to or more than your new, lower, maximum eligibility period.
Revised Pay As You Earn (RePAYE) Repayment Plan
If your monthly payment doesn’t cover all of the interest that accrues on your loan, this interest subsidy kicks in. How much interest is covered depends on your loan types.
Subsidized Loans: Uncle Sam pays 100% of the accruing interest for the first three years, afterward they pay 50%.
Unsubsidized Loans: Uncle Sam pays 50% of the accruing interest.
Furthermore, you have to have the "right type" of loan types. Eligible loans are: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct GradPLUS loans, and Direct Consolidation loans that don’t include a Parent Plus Loan. Loans cannot be in default.
Pay As You Earn (PAYE) or Income-Based Repayment (IBR) Repayment Plan
If your monthly payment doesn’t cover all of the interest that accrues on your loan, the interest subsidy kicks in. Interest subsidies on this repayment plan only apply to Subsidized loans (not unsubsidized).
Subsidized Loans: Uncle Sam pays 100% of the accruing interest for the first three years. That's it.
Your Direct Subsidized Loans, Direct GradPLUS loans, and Direct Consolidation loans that don’t include a Parent Plus Loan are eligible for this program. Loans cannot be in default.