The US House Appropriations Committee just advanced a proposal to eliminate federally subsidized student loans, so we wanted to unpack what this would mean for the students NCAN members serve.
Federally subsidized student loans are an important part of the student aid system for low- and middle-income undergraduates because they provide significant support that helps students afford college. As NCAN’s annual affordability gap analysis has consistently shown, most Pell-eligible students need loans, along with state and institutional aid, earnings, and family support, just to cover the cost of attendance. In fact, on average, the cost of attendance exceeds the sum of available resources by $1,555 at B.A.-granting public institutions.
Unlike unsubsidized loans, subsidized loans do not accrue interest while a student is enrolled at least half-time, during the six-month grace period after leaving school, or during approved deferment periods. This means that a student who borrows $5,500 in subsidized loans as a freshman will owe exactly $5,500 when repayment begins.
Eliminating the interest subsidy would shift that cost directly onto students. Under the House GOP Appropriations Committee proposal, the subsidized federal student loan program would be terminated, and interest would begin accruing on all federal student loans as soon as funds are disbursed. Any unpaid interest would capitalize, meaning it would be added to the loan principal and cause the balance to grow even faster.
Analysis of Cost to Students
Using data provided by Sallie Mae, NCAN calculated the increased cost of this proposal for student borrowers. For this analysis, we looked at a dependent undergraduate who borrows the maximum subsidized amount each year ($3,500 as a freshman, $4,500 as a sophomore, and $5,500 per year as a junior and senior), borrows up to the aggregate allowable level of $23,000, enters the standard repayment plan, does not make payments during the six month grace period following graduation, pays the loan off over ten years, and faces the current federal student loan interest rate of 6.5%. In this scenario, outlined in the table below, the student would:
- graduate with a loan balance $3,610 higher than it would have been if the subsidized loan program had continued
- pay $40.99 more per month; and
- pay a total of $4,918.89 more over the lifetime of the repayment period.
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With federal subsidy
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Without federal subsidy
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Initial loan total
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$31,000
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$31,000
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Total Subsidized
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$23,000
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$0
|
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Total Unsubsidized
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$8,000
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$31,000
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Capitalized interest (interest accrued while enrolled in postsecondary education on unsubsidized loans)
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$1,560
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$5,170
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Total loan balance upon graduation
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$32,560
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$36,170
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Interest rate
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6.5%
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6.5%
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Number of years in standard repayment plan
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10
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10
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Monthly payment amount
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$369.71
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$410.70
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Total payments over life of loan
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$44,365.47
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$49,284.36
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Total interest paid
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$13,365.47
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$ 18,284.36
|
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Remaining interest after capitalized interest over life of the loan
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$11,805.47
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$13,114.36
|
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Difference in beginning loan balance
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$3,610
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Difference in monthly loan payment
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$40.99
|
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Difference in total amount paid over life of loan
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$4,918.89
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This estimate is conservative and likely understates the policy change’s impact in several ways. For the millions of students who take five or six years to graduate, take a leave of absence, enter a longer repayment plan, or face higher interest rates, the cost would be significantly higher. And because low-income students are the primary recipients of subsidized loans, eliminating the subsidy would disproportionately burden those with the fewest financial resources to absorb additional debt. The net result? Some students would not enroll in the first place; others would stop out or drop out.
The US Senate rejected this proposal in 2025 while considering the budget reconciliation bill known as the One Big Beautiful Bill Act. The Senate will now revisit it as it again faces a Pell shortfall that must be addressed in FY27 under the Pell scoring rule. NCAN will work with policymakers to protect Pell and subsidized loans and to preserve low-income students’ ability to access and complete college.