What is the Federal Student Loan Interest Subsidy and How Can You Get It?

Jen Williamson Updated on May 13, 2019

Are you tackling a big monthly student loan payment with a salary that isn't as big as you'd hoped?

If so, income-driven repayment for your federal student loans can be a godsend. Under these plans, the government will reduce your monthly federal student loan payment to a more manageable rate based on your income.

It might seem like a great deal—but there can be a serious pitfall to look out for. Sometimes, your payment amount is too small to pay off the accrued interest every month. That’s how your loan can explode exponentially over the long term—even though you’re making your monthly payments.

See also: I Keep Paying, But It’s Like Pouring Into a Bucket With No Bottom 

To mitigate this problem, the government offers interest subsidies for some student loans being paid off under these plans. Here’s what you need to know.

What is the student loan interest subsidy?

If you qualify, the government will pay some of the interest you owe under some income-driven repayment plans. Depending on a few factors, the subsidy may cover some or all of the interest.

Usually, however, the interest subsidy doesn’t last for the entire length of your payment period.

Which loans qualify for the student loan interest subsidy? 

Not all loans qualify for income-driven repayment—and not all qualify for the subsidy. 

There are four kinds of income-based repayment plans. Of those, three—Pay-as-You-Earn (PAYE), Revised Pay-as-You-Earn (REPAYE), and Income-Based Repayment (IBR)—offer government interest subsidies in certain cases.

If you’re paying off your federal loans under one of those three plans, the following loans are eligible for the interest subsidy:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct GradPLUS Loans
  • Direct Consolidation Loans with no Parent PLUS Loans included

Which loans do not qualify for the student loan interest subsidy?

Any loans being paid off under Income-Contingent Repayment (ICR) plans don’t qualify for a federal interest subsidy.

In addition, the following types of loans don’t qualify regardless of which income-based repayment plan you have:

  • Direct Parent PLUS Loans
  • Loans in default
  • Consolidated loans that include Parent PLUS Loans
  • Unconsolidated Perkins Loans
  • Private student loans

However, you can include a Perkins loan if it’s been consolidated into a Direct Consolidation Loan with other eligible federal loans.

See also: Everything You Need to Know About Student Loan Consolidation 
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How can I get the student loan interest subsidy?

How you get the subsidy varies from plan to plan. Here’s how it works for each payment plan.

Revised Pay-as-You-Earn (REPAYE)

Under REPAYE, you pay your loans back over a 20-year period (for undergraduate loans), or a 25-year period (for graduate loans).

If your minimum payment isn’t enough to cover all of your interest on a monthly basis, the government will pay a portion of your interest:

  • For subsidized loans: all the interest that your payment does not cover, for a three-year period. After that, the government will kick in 50% of the interest beyond what your payment covers.
  • For unsubsidized loans: 50% of the interest beyond what your payment covers.

Pay-as-You-Earn (PAYE)

Under this plan, you have 20 years to repay your debt. If your new monthly payment doesn’t pay enough to cover your interest, the government will pay:

  • For subsidized loans: The government covers 100% of the difference between your total interest and what your payment covers, for a 3-year period.
  • For unsubsidized loans: The government doesn’t cover any interest.

Income-Based Repayment (IBR)

This plan also gives you a 20-year payment period. 

  • For subsidized loans: The government covers 100% of the difference between your total interest and what your payment covers, for a 3-year period.
  • For unsubsidized loans: The government doesn’t cover any interest.

Under income-based repayment it’s always crucial to know how much interest you owe, and whether your payment is covering it. But in some situations, the government will help. Hopefully, with interest subsidies, you’ll be able to pay off your loan without the interest eating you alive.

See also: Is Public Service Loan Forgiveness All It's Cracked Up to Be? 4 Things to Know

About the Author
Jen Williamson

Jen Williamson is a freelance writer living in Brooklyn. She has written for a variety of industries, including software, education, business, and personal finance. Prior to that, she worked at an adult literacy nonprofit in Philadelphia, where she coached nontraditional students in passing the GED test and applying for college. When she isn’t writing or reading—which is rare—she can usually be found planning her next travel adventure, training for a marathon, or sneaking in somewhere she’s not supposed to be. Read more by Jen Williamson

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