Is paying off FAFSA loans immediately worth it? Subsidized vs. unsubsidized strategy

Why wuld you take out loans if u don't need them??? Just don't accept the loans when they offer them in ur financial aid package. Borrowing money u don't need is dumb imo

Financial aid advisor here - this is actually something I discuss with students frequently. There are several considerations: • Subsidized loans: The government pays interest while you're in school and during the 6-month grace period after graduation. If you pay them off immediately after this period ends, you essentially had an interest-free loan. • Credit building: Federal student loans do appear on your credit report and can help establish credit history. However, there are other ways to build credit that don't involve taking on debt unnecessarily. • Loan forgiveness: This is a misconception. Paying off loans immediately would disqualify you from forgiveness programs as these require years of qualifying payments. • Emergency fund: Some students accept the loans and keep the money in high-yield savings as an emergency fund during school, then pay back what they don't need before interest accrues. If your parents' financial situation is solid, I'd recommend only taking subsidized loans as a safety net and returning/paying off any unsubsidized loans quickly since those accrue interest from day one.

my roommate did this! she took out the max subsidized loans ($5,500 freshman yr I think) even tho her parents could pay for everything. kept the $ in a high-yield savings account for 4 years while the govt paid the interest, then paid it all back after graduation. made like $800 in interest lol. not life-changing but free money 🤷‍♀️

Taking out loans just to build credit is extremely inefficient. You're much better off getting a student credit card with no annual fee, using it for small purchases, and paying it off in full each month. This builds credit history without the risks of student loans. Regarding the difference between loan types: - Subsidized loans: Government pays interest during school and 6-month grace period - Unsubsidized loans: Interest accrues from day one If you take unsubsidized loans and don't pay the interest during school, that interest capitalizes (gets added to your principal) when you enter repayment, meaning you'll pay interest on your interest. Finally, remember all federal loans have an origination fee (currently around 1.057% for Direct Subsidized/Unsubsidized). So even with subsidized loans, you're paying that fee for the privilege of borrowing.

The REAL question is why are your parents telling you to take out loans if they can pay??? When I was in school my parents made me take out loans saying the same thing but then they never helped pay them off. Just be prepared that maybe they aren't as ready to pay as they claim! Not saying your parents are lying but mine sure did lol and now I'm stuck with $47k in loans that I didn't need

Have you considered that taking subsidized loans and investing the money instead of using it for school could actually be profitable? With subsidized loans, government covers interest while you're in school. If you put that money in an index fund returning 7-10% annually, and then pay back the loan after graduation before your own interest starts, you could make a decent return. But this is technically a form of arbitrage and has risks. Markets could drop right when you need to repay. And if you forget to pay before the grace period ends, you're suddenly paying interest on money you didn't need. Plus there's that origination fee others mentioned.

I've been trying to get through to someone at Federal Student Aid about this exact question for WEEKS! Their phone system is absolutely terrible - it just disconnects me after 45 minutes on hold. So frustrating when you just need a simple answer about loan strategies!

just my 2 cents but accepting loans and then paying them off right away seems pointless. like just don't take them??? but whatevs

If ur parents can pay for school BE GRATEFUL instead of trying to game the system!!! Some of us have $95k in loans and can barely afford rent 😭

One additional point that hasn't been mentioned: keeping your subsidized loan amounts available can be valuable if your financial situation unexpectedly changes during college. If you don't take the loans now but then need them later, you might only have unsubsidized options available. Think of subsidized loan eligibility as a resource that, once unused for a particular academic year, doesn't roll over. You're allotted a certain amount for each year of your education.

As someone who just went through this decision last year, I'd say the consensus here is pretty solid - subsidized loans as a safety net, skip the unsubsidized ones. One thing that helped me decide: I accepted my subsidized loans but kept that money in a separate high-yield savings account earning about 4.5% APY. Since the government pays the interest while I'm in school, it's basically free money sitting there earning interest. I'll reassess before graduation whether to pay it back or keep it for the grace period. The peace of mind is worth it too - knowing I have that financial cushion if something unexpected happens to my family's situation. College is unpredictable and having options is valuable even if you don't think you'll need them. Just make sure you understand exactly when interest starts accruing and set reminders so you don't accidentally end up paying interest you didn't need to!

I went through a similar decision with my parents last year! After reading all these responses and doing my own research, here's what I learned: The subsidized loan strategy can actually make sense if you're disciplined about it. I accepted my full subsidized amount ($5,500 freshman year) and put it in a high-yield savings account earning 4.8% APY. The government pays the interest while I'm in school AND during the 6-month grace period after graduation. So far I've earned about $220 in interest with zero risk, and I still have 2.5 years of school left plus the grace period. When I graduate, I can either pay back the original loan amount (keeping all the interest I earned) or decide to keep the loan if my situation has changed. The key things I learned: • Only take subsidized loans - unsubsidized start charging interest immediately • Keep the money separate in a high-yield savings account • Set calendar reminders for when the grace period ends • Factor in the ~1% origination fee when calculating if it's worth it It's basically a guaranteed arbitrage opportunity if you can resist spending the money. But definitely skip it if you're not disciplined with money or don't want the complexity!

Reading through all these responses has been incredibly helpful! I think I'm starting to understand the strategy better now. It sounds like the consensus is: 1) Accept subsidized loans as a financial safety net since the government pays interest during school + grace period 2) Decline unsubsidized loans unless actually needed (since they accrue interest immediately) 3) Keep subsidized loan money in high-yield savings to earn some risk-free return 4) Set strict reminders about grace period deadlines 5) Factor in the ~1% origination fee when calculating potential benefits The real-world examples from people who've actually done this are super valuable. I think my parents' suggestion makes more sense now - it's not really about building credit (credit cards are better for that), but more about having a financial cushion and potentially earning a small return on what's essentially a free loan. Thanks everyone for the detailed explanations and honest perspectives! I feel much more informed about making this decision now.

Just wanted to add another perspective as someone currently using this strategy! I'm a junior and have been accepting subsidized loans each year even though my family can cover tuition. What I've learned that might help: • The annual loan limits increase each year ($5,500 fresh/soph, $6,500 junior/senior for dependent students) • I've been putting the money in Treasury I-bonds when possible (currently paying 4.28%) since they're inflation-protected • The psychological benefit of having that safety net is honestly huge - knowing I have options if something unexpected happens One thing to watch out for: make sure your school's financial aid office knows your plan if you're keeping loan money instead of using it for direct expenses. Some schools have policies about loan refunds that you should understand. Also, if you do decide to pay back early, you can make payments toward principal anytime without penalty, which gives you flexibility to adjust the strategy as you go. The key is really just being intentional about it rather than taking loans "just because" - sounds like you're thinking about it the right way!

This thread has been incredibly educational! As someone just starting to navigate financial aid decisions, I really appreciate all the detailed explanations and real-world examples. One question I haven't seen addressed: does accepting subsidized loans affect your eligibility for other forms of financial aid in future years? Like if I take the full subsidized amount this year but don't actually use it for school expenses, could that impact need-based aid calculations later? Also, for those who have used the high-yield savings strategy - do you report that interest income on your FAFSA? I'm wondering if earning interest on loan money could paradoxically hurt your aid eligibility by increasing your reported income/assets. The consensus here seems to be that subsidized loans as a safety net makes sense, but I want to make sure I'm not accidentally creating complications for future aid years!

This has been such an informative discussion! As someone who's been weighing similar options, I wanted to share what I've learned from my school's financial aid counselor that might be helpful. One thing that hasn't been mentioned much is the aggregate loan limits. Even if you take subsidized loans now and pay them back, those amounts still count toward your lifetime federal loan limits (currently $31,000 total for dependent undergrads, with only $23,000 of that eligible to be subsidized). So if you think there's any chance you might need loans for graduate school later, you might want to preserve some of that borrowing capacity. Also, regarding the FAFSA question someone raised - loan proceeds themselves don't count as income, but any interest you earn on invested loan money would be reportable income. However, for most students the impact would be minimal due to the student income protection allowance. The strategy that makes most sense to me after all this research: accept subsidized loans only, keep them in a high-yield savings account, and view it as both a safety net and a small arbitrage opportunity. The peace of mind alone seems worth the small origination fee, especially given how uncertain college expenses can be! Thanks everyone for sharing such detailed experiences - this community is incredibly helpful for navigating these complex decisions.

This whole thread has been incredibly eye-opening! As someone who's currently filling out my FAFSA for the first time, I had no idea there were so many strategic considerations around federal student loans. The consensus seems pretty clear: subsidized loans can make sense as a safety net even if you don't immediately need them, since the government pays the interest during school and the grace period. But unsubsidized loans should be avoided unless actually needed since they start accruing interest right away. I'm particularly intrigued by the high-yield savings account strategy - essentially getting paid to hold onto free money for 4+ years. Even with the ~1% origination fee, it seems like a no-brainer if you're disciplined enough to not spend it. One thing I'm curious about that I haven't seen mentioned: if you accept subsidized loans but your family's financial situation improves significantly during college, can you pay them back early without any penalties? It would be nice to have that flexibility to exit the strategy if circumstances change. Thanks everyone for sharing such detailed real-world experiences - this is exactly the kind of practical advice that's hard to find elsewhere!

This has been such a valuable discussion! As someone just starting to think about college financing, I had no idea there were so many nuances to federal student loan strategy. From everything I've read here, it sounds like the smart approach is: - Accept subsidized loans as a financial safety net (government pays interest during school + 6 months after) - Decline unsubsidized loans unless actually needed (interest starts immediately) - Keep subsidized loan money in high-yield savings to earn risk-free returns - Set reminders about grace period deadlines to avoid accidental interest charges The real-world examples have been incredibly helpful - seeing actual numbers like earning $220+ in interest over the college years makes the strategy much more concrete. I also appreciate the warnings about being disciplined enough not to spend the money and the importance of understanding origination fees. One question I still have: for those using this strategy, do you keep the loan money in a completely separate bank account to avoid any temptation to spend it? I'm worried about accidentally dipping into it for non-essential expenses during college. Thanks everyone for sharing such detailed experiences - this community is amazing for learning about financial strategies that aren't taught in high school!

This thread has been absolutely invaluable! As a newcomer to the financial aid process, I was completely overwhelmed by all the loan options and strategies until reading through these detailed responses. The subsidized loan safety net approach makes so much sense now - essentially getting an interest-free emergency fund that can also earn returns in a high-yield savings account. I love how multiple people have shared actual numbers and real experiences rather than just theoretical advice. A few key takeaways that really stood out to me: • The importance of keeping loan money in a completely separate account (great tip about using a different bank entirely!) • Setting calendar reminders for grace period deadlines • Understanding that the ~1% origination fee still makes the strategy worthwhile • Remembering that borrowed amounts count toward lifetime federal loan limits One thing I'm wondering: for those who've been successful with this strategy, how do you handle the psychological aspect? Even knowing it's a smart financial move, does having that debt (even if it's interest-free) create any stress or anxiety? I'm naturally pretty debt-averse, so I'm curious how others have dealt with that mental hurdle. Thanks to everyone who shared their experiences - this community is such a great resource for navigating these complex financial decisions!