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.
Paying Off Your Loan Early
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.
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 . . .
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.
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.
Paying student loans means accumulating higher-interest debt
It usually doesn't make sense to prioritize student loans over higher-interest debt, such as credit card debt. The same is true if you're accumulating more credit card debt to pay off student loans early.
You can make prepayments on your loan while you are in school or during your grace period. Be aware, however, that any prepayment you make will not count as a qualifying payment in any loan forgiveness programs.
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.
The major difference between subsidized and unsubsidized student loans has to do with interest. Direct Subsidized Loans: You won't be charged interest while you're enrolled in school or during your six-month grace period.
Drawbacks of Subsidized Loans
Subsidized loans can be really helpful if you're eligible, but not all students are. Plus, the amount you can borrow is limited per academic year. So, even if you qualify for one, a subsidized loan might not get you all the money you need for college.
So the goal is to pay down the principal as quickly as possible. If you send more than the amount due each month, the extra funds are first applied to any outstanding interest and the remaining amount goes directly toward paying down your principal.
But student loan forgiveness tax consequences could lead to surprise bills — sometimes called the student loan tax bomb — when borrowers submit their tax returns. The IRS considers canceled debt, including most forms of student loan debt forgiveness or student loan discharge, to be taxable income.
Unlike a subsidized loan, you are responsible for the interest from the time the unsubsidized loan is disbursed until it's paid in full. You can choose to pay the interest or allow it to accrue (accumulate) and be capitalized (that is, added to the principal amount of your loan).
Grants and Student Loans
If you get your loan money, but then you realize that you don't need the money after all, you may cancel all or part of your loan within 120 days of receiving it and no interest or fees will be charged.
You'll also be eligible for student loan forgiveness on any remaining balance after the repayment period ends. This is usually after 20–25 years. Both direct subsidized and unsubsidized loans are eligible for any of the four IDR plans.
A student who has an overpayment of an FSA loan or grant loses eligibility for FSA program aid but may re-establish eligibility by repaying the excess amount or making arrangements satisfactory with the school (optional) or Department to pay the excess amount.
Best repayment option: standard repayment. On the standard student loan repayment plan, you make equal monthly payments for 10 years. If you can afford the standard plan, you'll pay less in interest and pay off your loans faster than you would on other federal repayment plans.
If your EFC is high, it generally means that your family's income is high. Parental income is one of the biggest drivers of Expected Family Contribution. This is because the FAFSA takes both parents' income into account, as well as the student's income.
Your interest charges will be added to the amount you owe, causing your loan to grow over time. This can occur if you are in a deferment for an unsubsidized loan or if you have an income-based repayment (IBR) plan and your payments are not large enough to cover the monthly accruing interest.