Student Loan repayment has been in the news of late. CNBC published an article this week that discusses the type of student loan and repayment information updates that may help you plan accordingly.
Interest accrual is a key difference between the types of federal loans. There are two types of debt” a) the subsidized loan and b) the unsubsidized loan. I’ll recap their information below and if you wish to read it directly, here is the link to access the article.
Image by Adrian Malec from Pixabay
Key Points
- Student loan payments and interest accrual have been paused since 2020 due to the pandemic. They’re set to resume in October and September, respectively.
- Interest accumulation is a key difference between Direct Subsidized Loans and Direct Unsubsidized Loans.
- The U.S. Department of Education pays interest on subsidized loans in some cases, like when borrowers are in school or defer their loan payments. That’s not true of unsubsidized loans.
Direct Subsidized Loans are available to undergraduate students who demonstrate a financial need.
These loans don’t accrue interest while a borrower is in school (at least half-time) or during a six-month grace period after leaving school. The loans also don’t accrue interest during deferment, a period when payments are postponed due to unemployment or economic hardship. The U.S. Department of Education pays the interest on subsidized loans in these instances.
However, that protection isn’t available for Direct Unsubsidized Loans, which are available to a broader group of borrowers (including graduate students) and are not based on financial need. Interest on unsubsidized loans starts accruing immediately and borrowers are responsible for interest amassed during all periods — making this debt more expensive than subsidized loans.
In some cases — after a deferment, for example — unpaid interest on unsubsidized loans may “capitalize.” When this happens, unpaid interest is added to the loan’s principal balance; future interest is then calculated off that higher principal, thereby 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 Education Department data. About 30.7 million people have an unsubsidized loan, with an average balance of about $19,000, according to the Education Department.
(The term Stafford Loan is an informal way of referring to Direct Subsidized Loans and Direct Unsubsidized Loans made via the Direct Loan Program. It also refers to subsidized or unsubsidized Federal Stafford Loans made via the Federal Family Education Loan, or FFEL, program.)
Student Loan Pauses and Waivers
- The payment pause and interest waiver has been in place for more than three years, since the onset of the pandemic in 2020.
- During that time, interest wasn’t accruing on any loans — meaning unsubsidized loans essentially became subsidized debt for some borrowers.
- However, interest will start accumulating on borrowers’ debt again on Sept. 1, and monthly payments will resume in October.
- The interest waiver cost the federal government about $5 billion a month.
The SAVE Plan
The White House announced the SAVE (Saving on a Valuable Education) Plan to address people with a student loan. This is an income-driven repayment plan allowing all student borrowers in repayment to enroll later this summer, before monthly payments are due to restart. To learn more about the SAVE Plan, visit the Department of Education’s website to download a PDF.
Image by Gerd Altmann from Pixabay
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