Paying Down Unsubsidized Student Loans While in School

Written by: Kristyn Pilgrim
Updated: 6/09/20

Are you in the process of applying for student loans? Are you already in college, wondering how you can become debt-free as fast as possible?

When applying for federal student loans, subsidized loans are your best bet. With lower interest rates and more favorable repayment terms, you’ll pay less in the long run. 

However, many students don’t qualify for subsidized loans. These students typically take out unsubsidized loans, which start accruing interest the moment the student receives the loan proceeds. 

Here, we’ll cover the basics of unsubsidized loans, why you should pay off your annual interest expense while in school, and some options for making a little extra money to help you pay down your debt. 

What Are Unsubsidized Student Loans? 

Let’s start with the basics. When you take out federal student loans to pay for higher education, you can either receive subsidized or unsubsidized debt. According to the Department of Education, subsidized loans offer slightly better terms than unsubsidized loans. Interest rates for unsubsidized loans are roughly 1.5 percentage points higher than those for subsidized loans. 

To receive subsidized loans, students must demonstrate financial need. Your university determines how much money you can borrow – the amount must not exceed your requirements. Federally subsidized loans are only available for undergraduate students. 

The federal government pays interest on subsidized loans while the student is in school and during a six-month grace period after graduation.

Students who don’t qualify for subsidized loans – either because they’re graduate students or can’t prove financial need – can opt for unsubsidized loans instead. As with subsidized loans, the educational institution determines the amount students can borrow.

Unlike subsidized loans, interest starts accruing on unsubsidized loans the moment student receives the money. If you don’t pay the interest during your studies and grace periods, the government will add it to the principal amount of your loan. 

Comparing Subsidized and Unsubsidized Loans 

Let’s say you take out a $1,000 subsidized loan at an interest rate of 5.05% (the current rate at the time of this writing). At the end of four years of college, you’d still owe $1,000. Interest would only start to accrue six months after you graduate. If you started paying back $50 per month (the minimum for student loan payments) after the grace period ends, it would take you roughly one year and nine months to pay back your loan. 

On the other hand, let’s assume you took out a $1,000 unsubsidized loan. As of the time of this writing, the interest rate for unsubsidized loans is 6.6%. Unlike with the subsidized loan, you’ll start accruing interest the moment you receive the money. 

Let’s say you accept the loan money six months before you start school, attend college for four years, and then begin paying back your loan six months after graduating. In total, you will have held the loan for five years. 

At the end of the five years, you’d owe $1,376.53 – significantly more than the $1,000 you’d owe if you had a subsidized loan. Given the larger post-college principal amount and the higher interest rate, paying back your loan in $50 monthly installments would take two and a half years.

As you can see, interest can add up quickly. If you can qualify for subsidized loans, you should jump at the chance for lower interest rates and deferred payment. However, if you have an unsubsidized loan, never fear. By paying down your unsubsidized loan while in school, you can become debt-free much faster. 

Why Should You Pay Interest on Unsubsidized Loans While in School? 

By paying interest on unsubsidized loans, you can prevent your principal from growing out of control while you’re in school. For example, let’s revisit our unsubsidized loan example above.

If you have a $100,000 loan at 6.6% interest, you’ll need to pay $6,600 worth of interest each year. If you successfully pay off the interest every year, you’ll finish college with $100,000 in debt – the amount you originally borrowed. 

If you pay $1,000 each month, starting six months after graduating, you will finish paying off your student loans in just over 12 years (146 months). Now, that’s still about two years longer than if you had subsidized loans. However, it’s a full eight years earlier than if you hadn’t paid interest while in school. 

In this example, if you graduate college when you’re 22, paying down interest while in school is the difference between being debt-free in your early 30s or your 40s. That’s almost a decade of less stress and greater financial flexibility. 

What If I Pay Principal on Unsubsidized Loans While in School? 

If you’re motivated, you might even try to pay down the principal amount you owe while in school. The sooner you can start paying back your lender, the sooner you’ll be debt-free. 

Let’s go back to the $100,000 example at a 6.6% annual interest rate. Let’s also say you find a part-time job or internship that pays $15 per hour. During the year, you work 10 hours per week, permitting you to have enough time to study. In the summer, let’s say you work 30 hours per week, allowing for a summer class or a bit of extra free time. 

In this example, you would earn $11,700 in wages each year. After accounting for taxes, you might expect to take home roughly $10,600 in pay. 

If you pay the entire $10,600 toward your loan, you’ll successfully pay down your first year’s interest expense of $6,600. Plus, you’d pay off $4,000 of principal – the outstanding loan amount. 

So, at the end of your first year, you’d only owe $96,000. If you keep putting that $10,600 toward your loan each year, your interest and principal will start declining quickly. 

At the end of your second year, you’d owe $6,336 in interest ($96,000 X 6.6%). If you paid $10,600 toward your loan, you’d pay off all the interest and $4,254 of principal ($10,600 – $6,336). At the end of your second year, you’d owe $91,746. 

At the end of your third year, you’d owe $6,056 in interest ($91,764 X 6.6%). After paying your $10,600, your loan balance would shrink to $87,220. 

Finally, at the end of your fourth year, you’d owe $5,757 in interest ($87,220 X 6.6%). After contributing your yearly wages of $10,600, you’d be left with a loan of $82,377. 

If you started paying down $1,000 of your student debt each month following graduation, you’d be debt-free in just over nine years (111 months). While finding a flexible job during school may be challenging for some students, paying off the principal while in school is worth the effort. By taking the initiative to start tackling student debt, you can enjoy years more of debt-free freedom in adulthood. 

How to Earn Money to Pay Down Unsubsidized Loans

We know finding flexible work isn’t always easy. The following is a list of some common ways students can make a little extra money to start paying down unsubsidized student loans: 

  • Work-study. Students receiving financial aid may qualify for flexible on-campus employment in dorms, dining halls, or student unions. 
  • Tutoring. If you excel in math, science, Spanish, or any other subject, consider tutoring other students in your spare time. You’ll earn some extra cash and make some new friends. 
  • Become a tour guide. If you love your school, why not convince other students to attend? Plus, you’ll get essential public speaking skills. 
  • Ride-sharing. If you have a car, consider driving for Lyft or Uber every once in a while. You can work more in slow periods and ease off during finals. 
  • Research assistant. Teaming up with a professor in your field as a research assistant can help you earn a little money on the side while developing your skills and expertise. 
  • Internships. Getting a summer internship is an excellent way to start making connections with potential employers and build your resume. 

If you can work even a few hours per week during the school year, you’ll be able to start paying down interest on your unsubsidized loans. You’ll be grateful when you become debt-free faster than your peers. 

Get Help With Student Loans

If you or someone you know is in the college selection process, visit College Finance for in-depth resources helping students and parents with financial planning. Whether you want to learn about financial aid, paying down student loans, or other financing options, the experts at College Finance can help you plan for the future.