If you’ve borrowed federal student loans to pay for college, you likely already know that there’s a lot of complicated terminology that comes with borrowing. But even though it can be confusing, it’s important to know whether your student loans are subsidized or unsubsidized — and what that means for how much you’ll pay over time and what kind of benefits you can receive.
There are two types of federal student loans available to undergraduates: subsidized loans and unsubsidized loans. The type of loan you can borrow is based on the information you provide in your Free Application for Federal Student Aid, better known as the FAFSA.
[Read: Understanding the Types of Federal Student Loans Available.]
What Is a Subsidized Student Loan?
Students with high financial need are eligible for federal subsidized student loans, which come with more benefits than unsubsidized loans. Currently, if you qualify for a subsidized loan, you can borrow for up to 150% of the published length of your program of study.
For example, if you’re enrolled in a four-year bachelor’s degree program, you can borrow subsidized loans for up to six years of enrollment. Or, if you’re enrolled in a two-year associate degree program, you can take out subsidized loans for up to three years of enrollment.
If you take longer to complete your program, interest will start accruing on your subsidized loans and you won’t be eligible to borrow any more subsidized loans. If you switch programs, the time you received a subsidy in the old program counts against the total time you get in the new program.
However, under a new coronavirus stimulus deal announced on Dec. 20 by congressional leaders, the federal government would no longer cut off the subsidy for borrowers who are still in college beyond 150% of their expected program length. This means the government would continue to make interest payments on subsidized loans regardless of how long borrowers are in college. Congress has passed the stimulus bill, which will become law once President Donald Trump signs it.
Keep in mind there are also limits to how much you can borrow in subsidized loans, so even if you’re eligible for one, you may still need to borrow some unsubsidized student loans to cover all your costs. Unsubsidized loans are available to students regardless of financial need. Interest accumulates on these loans while you’re in school.
What Are the Benefits of Subsidized Student Loans?
One major perk of subsidized loans is that the federal government covers interest payments while you’re enrolled as a student at least half time. This means that your loan does not accumulate interest and your loan balance doesn’t grow while you’re in school.
[Read: Reasons to Pay Student Loan Interest During School.]
The government also provides interest subsidies for subsidized loans while borrowers are enrolled in certain repayment plans.
When repaying your federal student loans, you have the option of enrolling in a repayment plan that bases your monthly payments on a percentage of your income, if you qualify. This can mean a more affordable monthly payment, but that payment may not cover all of the interest that accrues on your loans each month. Three such plans — the REPAYE, PAYE and IBR plans — include an interest subsidy.
In REPAYE, or Revised Pay As You Earn, if your monthly payment doesn’t cover all of your interest, the federal government pays all of the remaining interest that is due on your subsidized loans for up to three consecutive years from the date you enter REPAYE, and half of the remaining interest on your subsidized loans after this three-year period. The government also covers half of the remaining interest due on your unsubsidized loans for the full length of your repayment period.
[Read: Comparing PAYE vs. REPAYE for Student Loan Repayment.]
Under PAYE, or Pay As You Earn, and IBR, or Income-Based Repayment, the government pays any interest that your calculated monthly payment doesn’t cover for up to three consecutive years from the date you enter the repayment plan. However, under these two plans, you are responsible for paying all of the interest that accrues on your subsidized loans after the end of the three-year subsidy period, as well as the interest that accrues on your unsubsidized loans.
Under all three repayment plans, the period of three consecutive years during which the government covers unpaid accrued interest does not include periods of deferment for economic hardship. This means that the subsidy continues while you’re in that type of deferment. The three-year period does, however, include time when you’re enrolled in any other type of deferment or forbearance.
Note that these terms and benefits don’t apply to some types of older federal student loans. If you have questions about older loans, refer to this guide from the U.S. Department of Education or contact your student loan servicer.
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What to Know About Subsidized Student Loan Interest and Repayment originally appeared on usnews.com
