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With an unsubsidized Direct Loan, students can defer payments until after graduation. Students also have the option of making interest only payments while in school rather than letting it accrue. If interest on a student loan is not paid as it accrues, the interest is added to the loan balance. This process is called interest capitalization. Interest capitalization can increase the size of a loan significantly. After the interest is added to the loan balance, the lender will start charging interest on interest, causing the loan balance to grow even faster. 

Making interest payments on the Unsubsidized Direct Loan while you are in school rather than deferring the interest, is an effective way to minimize student loan debt.

Below is an example of the difference in cost of an Unsubsidized Direct Loan where interest is paid while the student is in school as compared to the cost of the same loan when the interest is deferred and allowed to accrue and capitalize.

Initial Unsubsidized Direct Loan Balance: $26,000

Unsubsidized Direct Loan Interest Rate: 5.05%

Standard Repayment Term: 10 Years

Deferment Period: 48 months

Capitalization Frequency: Monthly

Note: The total amount paid with interest capitalization as a result of deferring interest on the unsubsidized loan is $38,255.35. This calculates to $4,395.35 more than would be paid without capitalization (interest is paid while attending school).

Repayment for both Subsidized and Unsubsidized Direct Loans begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years; however students may have the option of choosing alternate repayment terms by working directly with their lender. Some of these alternate repayment plans include extended, graduated, income contingent, or income-based repayment options.