When it comes to managing student loans, one of the common dilemmas borrowers face is whether to prioritize paying off subsidized or unsubsidized loans. Understanding the difference between the two is crucial in making an informed decision.
Subsidized loans are offered based on financial need, and the government covers the interest while the borrower is in school and during certain deferment periods. On the other hand, unsubsidized loans accrue interest from the moment they are disbursed, even while the borrower is in school. This means that if you have both types of loans, it’s generally wise to focus on paying off the unsubsidized loans first.
The rationale behind prioritizing unsubsidized loans is straightforward: they tend to have higher balances and accrue interest at a faster rate. By paying them off first, you can reduce the overall amount of interest you’ll end up paying over the life of the loan. Additionally, once the unsubsidized loans are paid off, you can then direct your payments towards subsidized loans, if you have any. This strategy can help you minimize the long-term financial burden of student loan debt.
(Response: It’s advisable to pay off unsubsidized student loans first, given their higher balances and faster interest accrual rates.)