Subsidized Grad PLUS Student Loan


This loophole would let graduate students pay no student loan interest under the SAVE plan while enrolled in graduate school.

Key Terms

  • Grad Plus loans accrue interest while in school, meaning you’ll graduate owing significantly more than you borrowed.
  • If you enter into repayment while in school under the SAVE plan, you may make $0 or minimal payments each month.
  • Under the SAVE plan, if you make $0 or minimal monthly payments, the rest of your accrued interest each month will be forgiven.
  • This strategy could save you tens of thousands of dollars in interest.

Every dollar you save while in school returns multiple dollars back to you. If getting a Subsidized Grad Plus Student Loan sounds like something that could help you financially, you might find this strategy useful.

To briefly summarize, here’s the strategy: 

A law student should enroll in the SAVE Plan and enter voluntarily repayment of Grad Plus loans while in law school. Because they have $0 income, they will have $0 monthly payments and the government will cover 100% of the interest payments. Therefore, the law student will benefit from a Subsidized Grad Plus loan while in school (i.e. the student will pay no interest), plus will accrue monthly payments towards IDR forgiveness.

For a Harvard law student, we think this strategy could save you almost $50,000 on your student loans.

Here are the key assumptions for this strategy:

  • The cost of attendance at Harvard Law is $111,000 per year
  • Students can borrow up to $20,500 in Stafford loans
  • The remaining balance of $90,500 can be taken out in Grad Plus loans
  • Grad Plus loans have 8.05% interest rates
  • Grad Plus loans are unsubsidized
  • Grad Plus loans accrue interest while the student is in school
  • Under the SAVE plan, if you have no income, your required monthly payment is $0 per month
  • Under the SAVE plan, the government pays 100% of the interest not covered by your monthly payment
  • If your monthly payment is $0, the government pays 100% of the interest

Here are the action items for this strategy:

  • Take out Grad Plus loans as needed
  • Try to minimize Grad Plus loans while in law school
  • Your school will notify your loan servicer that you are enrolled
  • Your loan servicer will put your Grad Plus loans into deferment automatically
  • Call your loan server and ask your loans to be put into repayment under the SAVE plan
  • Repeat the last step every semester because each semester your school will report you as enrolled, automatically kicking your loans back into deferment

Here is a summary of the benefits for this strategy:

  • With $0 income, your payments will be $0 and the government will cover 100% of the interest.
  • $0 monthly payments still count towards IDR forgiveness, so after graduation you will start with years of payments toward forgiveness

The rest of this article outlines the strategy and the important concepts. 

Subsidized vs unsubsidized student loans

Subsidized and unsubsidized loans are two types of federal student loans available to students. They differ primarily in terms of interest accrual and financial need criteria. Subsidized loans are offered to undergraduate students with demonstrated financial need. 

The key advantage of subsidized loans is that the Department of Education pays the interest on the loan while the student is in school at least half-time, for the first six months after the student leaves school, and during any period of deferment. 

This can significantly reduce the amount owed over the life of the loan. Unsubsidized loans, on the other hand, are available to both undergraduate and graduate students, regardless of financial need. 

With unsubsidized loans, interest accrues from the time the loan is disbursed, including while students are in school and during grace or deferment periods. This means the total amount repaid over the life of an unsubsidized loan will be higher than the original borrowed amount. Both loans have limits on the amount that can be borrowed, which vary based on the student’s year in school and other factors.

Grad PLUS student loans are unsubsidized

Grad PLUS loans are a type of federal financial aid available to graduate students, including those in professional programs like medicine or law. These loans are unsubsidized, meaning that interest begins to accrue on the loan amount from the time of disbursement. 

Assume you are attending Harvard Law, where the cost of attendance is $111,000 for the current year. The maximum amount a graduate student can borrow under the Direct Unsubsidized Loan program is $20,500 per year.

To meet the total $111,000 cost of attendance, you will need to borrow an additional $90,500 from Grad Plus loans each year.

Here’s the math:

Amount
Direct Subsidized Loan $20,500
Grad Plus Loan $90,500
Total $111,000

Consider a first-year law student who borrows $90,500 from a Grad Plus loan at an 8.5% interest rate. Since the Grad Plus loan is unsubsidized, interest accumulates while she is in school. After three full years of law school, without making any payments, the student would owe approximately $113,846 on that initial $90,500 loan. This calculation assumes simple interest with no capitalization.

Year Loan Balance Interest
1L $90,500 $7,692
2L $98,193 $7,962
3L $105,884 $7,962
At Graduation $113,846

Because the student needs to borrow an additional $90,500 each year (assuming tuition won’t go up, even though it will), the actual balance looks more like this.

Year Loan Balance Interest
1L $90,500 $7,692
2L $188,692 $15,384
3L $294,576 $23,076
At Graduation $317,652

This results in the following loan balances.

Amount Borrowed Interest Accrued Amount Owed
$271,500 $46,152 $317,652

SAVE plan has 100% interest subsidy

Under the SAVE student loan repayment plan, if a borrower’s income-driven repayment calculation results in a $0 monthly payment, they receive a 100% interest subsidy. 

This means that for borrowers who qualify for a $0 monthly payment due to low income or other financial challenges, the government will cover all the accruing interest on their subsidized federal student loans during this period.

For example: If $50 in interest accumulates each month and you have a $30 payment, the remaining $20 would not be charged.

Or, if $50 in interest accumulates each month and you have a $0 payment, the remaining $50 would not be charged. 

This feature is particularly beneficial as it prevents the loan balance from growing due to accumulating interest.

Grad students can elect to be in repayment while in school

Grad PLUS loans offer a flexible repayment feature that can be particularly advantageous for proactive borrowers. Unlike some student loans that require deferment while the borrower is still in school, Grad PLUS loans do not mandate required deferment while in school. 

This means that graduate students have the option to enter repayment and start making payments on their Grad PLUS loans while still attending school. This voluntary choice to begin repayment early can be financially strategic. By making payments during school, students can tackle accruing interest and reduce the overall amount they will owe post-graduation. 

But more importantly, if you have $0 in income during the calendar year, your monthly payment will be $0 while you are in school.

Grad students with no income would have a $0/monthly repayment

If a student with no income chooses to enter repayment on their Grad PLUS loans while still enrolled in school, they would be eligible for an income-driven repayment (IDR) plan.

Under IDR plans, monthly payments are calculated based on the borrower’s income and family size. Therefore, for a student with no income, this calculation would result in a required minimum payment of $0 per month. 

This allows students to be officially in repayment status without the financial burden of monthly payments. Being in repayment can have advantages, such as starting the clock on any potential loan forgiveness programs that are contingent on a certain number of qualifying payments. 

Additionally, for unsubsidized loans like Grad PLUS, being in repayment while in school with no income can be particularly beneficial under the SAVE student loan plan. 

This plan offers a unique advantage where if a borrower’s income-driven repayment plan calculates a monthly payment of $0 due to their lack of income, the government steps in to subsidize 100% of the interest. 

Therefore, for a student with no income making $0 monthly payments on their Grad PLUS loans, the SAVE plan effectively translates to a 0% interest rate during this period. The government covers all the accruing interest, preventing the loan balance from increasing. 

This scenario is highly advantageous for students, as it allows them to keep their loan balance from growing while they focus on their studies, without the financial pressure of accumulating interest.

If you’re able to eliminate the interest on your Grad Plus loans, the overall financial picture looks more like the table below.

Amount Borrowed Interest Accrued SAVE Subsidy Amount Owed
$271,500 $46,152 -$46,152 $271,500

Conclusion

To summarize this strategy:

  • Grad Plus loans accrue interest while in school, meaning you’ll graduate owing significantly more than you borrowed.
  • If you enter into repayment while in school under the SAVE plan, you may make $0 or minimal payments each month.
  • Under the SAVE plan, if you make $0 or minimal monthly payments, the rest of your accrued interest each month will be forgiven.
  • This strategy could save you tens of thousands of dollars in interest.
Joshua Holt

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He is always negotiating better student loan refinancing bonuses for readers of the site.

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