It is generally recommended to pay off the unsubsidized loans first rather than the subsidized loans when prioritizing student debt payments. Here is why:
Prioritizing debt by interest rate.
First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on. As you work your way down the list, be sure to continue making the required minimum payments on all accounts.
If you qualify for subsidized loans, use them first. They are your cheapest option, since the government pays the interest while you're in school.
Drawbacks of Unsubsidized Student Loans
You're responsible for paying the interest on that loan from day one. Unsubsidized loans are not the worst loans you can borrow in terms of pure cost and the interest rate that you'll receive. However, the interest accumulates even before you enter repayment.
Remember: any unused student loan money is still part of your loan and must be repaid. You are responsible for paying interest on the unused funds, even if you don't use them at the original disbursement date.
Which loan should I accept? Given the option, you should accept a Direct Subsidized Loan first. Then, if you still need additional financial aid to pay for college or career school, accept the Direct Unsubsidized Loan.
You may prepay all or part of your federal student loan at any time without penalty. Any extra amount you pay in addition to your regular required monthly payment is applied to any outstanding interest before being applied to your outstanding principal balance.
Borrowers can choose from four types of federal student loan repayment plans. But the best one for you will likely be the standard repayment plan or an income-driven repayment plan, depending on your goals. Standard repayment lasts 10 years and is the best one to stick with to pay less in interest over time.
Federal student loans are made by the government, with terms and conditions that are set by law, and include many benefits (such as fixed interest rates and income-driven repayment plans) not typically offered with private loans.
Key Takeaways. Paying off a loan may lower your credit score, but if you practice good credit habits the effect will be minimal. Paying off a loan early can reduce your debt-to-income ratio, which can benefit your credit. Your credit score is based on a number of factors, like payment history and credit utilization.
FHA Loans. FHA loans, insured by the Federal Housing Administration, are a popular choice for first time buyers due to their flexible requirements.
Payment history is the most important factor in maintaining a higher credit score as it accounts for 35% of your FICO Score. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
Subsidized loans are the best first choice for borrowers; since the federal government covers the interest that accrues on your loans, it's less money for you to pay out of pocket. This is especially true for borrowers who are unable to make interest payments while they're in school.
Interest accrual, interest capitalization, fees, deferment, forbearance, and grace periods can all increase your student loan balance. Paying more than the minimum each month, making extra payments, and paying interest while in school can help reduce your loan costs.
The fastest way to pay off student loans is to pay more than the minimum each month. The more you pay toward your loans, the less interest you'll owe — and the quicker the balance will disappear.
It's a good idea to start paying back unsubsidized student loans first since you'll likely have a higher balance that accrues interest much faster. Once your grace period is over, even subsidized loans will start accruing interest.
You can make payments before they are due or pay more than the amount due each month. Paying a little extra each month can reduce the interest you pay and reduce the total cost of your loan over time. Contact your loan servicer to discuss these options.
Cons Explained
Only for undergraduate use: Subsidized loans can only be used for undergraduate studies. Financial need required: For a subsidized loan, you must demonstrate financial need.
If you are awarded Federal Direct Subsidized or Unsubsidized loans, each loan must be accepted or declined. ALL of a Subsidized Loan must be accepted before accepting any portion of an Unsubsidized Loan.
You'll have to repay the money with interest. Subsidized loans don't generally start accruing (accumulating) interest until you leave school (or drop below half-time enrollment), so accept a subsidized loan before an unsubsidized loan.
There are no income limits to apply, and many state and private colleges use the FAFSA to determine your financial aid eligibility. To qualify for aid, however, you'll also need to submit a FAFSA every year you're in school.
How will I receive my Direct Subsidized Loan or Direct Unsubsidized Loan funds? The school will first apply the loan funds to your school account to pay for tuition, fees, room and board as well as any other school charges. Any additional loan funds will be returned to you.