Subsidized Stafford Loan Interest Doesn't Last Forever

Many college students are about to return from winter break and start a new semester. Some of those students are also starting to regret signing up for that 8 a.m. class, or the Pet Apparel and Fashion elective.

But deciding to drop that class could hurt more than your academic credit count. Believe it or not, it could mean the end of your student loan interest subsidy.

During the summer of 2012, Congress prevented subsidized Stafford loan interest rates from doubling for another year. But Congress paid that $6.7 billion price tag essentially by limiting how long the government will pay students' loan interest while they're in school -- a change that both kept rates low and encouraged students to avoid taking on as much debt by finishing on time.

Learn to [make a college cost plan to limit student loans.]

The big problem is that the change is confusing, even to those of us who study student loan policy daily. First, here's a look at the basics.

Only subsidized Stafford loans are eligible for what's called an interest rate subsidy -- when the government pays the interest accruing on loans.

For most borrowers, the interest subsidies kick in while they are in school at least half time and during their six-month grace period, during deferments and at some limited times under the income-based repayment plan. Under every other status or circumstance, borrowers are responsible for paying the interest.

Those rules apply to borrowers who had subsidized Stafford loans before July 1, 2013. For anyone who took out loans for the first time after July 1, 2013, continue reading.

These new rules apply only to borrowers who did not have Federal Family Education Loan Program or Direct Loan balances outstanding as of July 1, 2013. These rules also only to apply to undergraduate students, as graduate students have not been eligible for subsidies on new loans since July 1, 2012.

See ways to [avoid losing your student loan eligibility.]

The new rules state that eligible borrowers may receive subsidized Stafford loans for up to 150 percent of the published length of their degree or certificate program. So, students in a two-year degree program may receive subsidized loans for up to three years.

The new rules also limit the amount of time you receive the subsidy itself, to 150 percent of the published program length. This means students enrolled after the 150 percent mark become responsible for the interest accruing on existing subsidized Stafford loans -- whether or not they receive more loans -- as of the day their enrollment passes 150 percent.

Say that two-year program takes you four years to finish. At the beginning of the fourth year, you'll start accruing interest on the subsidized loans you have -- and you won't be able to receive any more subsidized Stafford loans.

Get [ tips to start student loan repayment off right from the start.]

If you switch programs, the time you received a subsidy in the old program counts against the total time you get in the new program.

For example, say there's a student who completes one year of a two-year program, then switches to a four-year program. That four-year program allows for six years of subsidy. But since the student used a year of subsidy in the two-year program, that student would have five years left instead of six.

Now, let's go from a longer program to a shorter program.

For example, say you attend a four-year program for three years and transfer to a two-year program. 150 percent of a two-year program is three years, and you have already used three years and are enrolling in year four. Now, you won't be able to receive new subsidized Stafford loans and the subsidized loans you have will begin accruing interest.

That wouldn't have happened if you'd stayed in the four-year program. It also wouldn't have happened if you had completed the longer program before transferring to the shorter one.

If you don't receive subsidized Stafford loans every year, it will not count against your maximum allowed subsidy time. If you're not attending school full time, your subsidy time will be prorated accordingly. If you don't receive the full amount of the loan, you will be considered to have used the full subsidy time.

There are some exceptions to these rules. The Department of Education has created this summary to cover some of the other exceptions.

If you still have questions, you can also check out this chart that breaks down when subsidized Stafford loans will be subsidized, or contact your financial aid office for more information.

Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask;" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.