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Subsidized  Vs. UnSubsidized Student Loans: Which is better?

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Dominique Broadway
Subsidized  Vs. UnSubsidized Student Loans: Which is better?

When you start looking for financial aid to help pay for your college education, federal student loans should always be at the top of your list. The US Department of Education has a variety of loans and other aid programs available for both undergraduate and graduate students which offer varying degrees of assistance. Even so, it can be tough to navigate the multiple options and know which you qualify for and which are not suitable for your needs. 

One of the first and biggest distinctions you’ll have to make is whether to opt for a federal direct subsidized loan or a Direct unsubsidized loan. The difference may seem minimal at first, but over the lifetime of your loan repayments, the former may be better for you, depending on your eligibility. 

Subsidized and unsubsidized loans are both offered directly by the government, but they differ in whether you pay interest while you’re still in school (a significant distinction to make). While both offer great options when it comes to your repayment, be sure to read on and learn about which type of loan you’re eligible, and which is the best match for your personal circumstances.

Difference Between Subsidized and Unsubsidized

What is a Direct Subsidized Loan? 

A direct subsidized loan (also known as a subsidized Stafford loan) is a federal loan that helps students with financial need by subsidizing their interest payments while they’re in school. While student loans still accrue interest while you’re in school, if your loan is subsidized, you won’t have to pay any of it before your grace period ends. 

Example

A normal loan for $20,000 with a 6.8% interest would mean you’d be paying $24,387 when your grace period ends. However, with a subsidized loan, the amount you’re paying once your grace period ends is still $20,000. 

How Much Does the Government Help? 

It’s important to note that while these loans are subsidized by the government, they’re not paying your principal while you’re in school. Subsidized loans are meant to help students with serious financial need to avoid getting deeper into a long-term hole once they graduate. While you’re in school and for six months after you leave, your interest payments are still accruing, but they’re covered by the government. This doesn’t mean that the Department of Education is paying for your loan, but it is helping you keep it manageable. 

How Do I Know if I Qualify for a Subsidized Student Loan? 

There are few student loan qualifications you need to meet to be eligible for a federal direct subsidized loan. To obtain a subsidized loan, you must: 

  • Be enrolled in your academic program at least half-time
  • Be an undergraduate student 
  • Have financial need, as determined 
  • Your expected family contribution is significantly lower than the cost of attendance at your chosen college or university.

Subsidized student loans still qualify for student loan consolidation, so keep in mind as you apply when looking ahead for the future. 

What is a Direct Unsubsidized Loan? 

Direct unsubsidized loans are federal student loans for undergraduates and graduate students that feature a set, low fixed interest rate, and friendly terms. These loans are available to any student and are not need-based.

This means that you can apply for them even without having to prove financial need and still qualify for the same beneficial interest rates. Rates change for undergraduate and graduate students (4.53% against 6.08% in 2019-2020), but they generally offer you the ability to take out more money than a subsidized loan would. 

Additionally, unsubsidized loans also qualify for every federal repayment and forgiveness program and include deferment and forbearance options as well. The qualification standards are similar to subsidized loans, but they do include some differences: 

  • You do not need to prove financial need to qualify 
  • You can be a graduate or professional student and still be eligible

What is the Difference Between Subsidized and Unsubsidized Loans

Both subsidized and unsubsidized loans are federal aid programs. The biggest difference between the two is that subsidized loans are meant for those with financial need, while unsubsidized loans are available to anyone.

Additionally, you won’t have to pay interest on your subsidized loans while you’re enrolled and for six months after.

On the other hand, you’ll have to start paying off your interest for an unsubsidized loan immediately or pay a higher principal after you graduate due to capitalization. 

Even so, you can likely still qualify for both (and many people do choose to take out both) and have the option of choosing your best option. Read on to see how subsidized vs unsubsidized student loans stack up. 

How Are They Different? 

Financial Need Requirement – Subsidized loans are reserved exclusively for students who can prove they have financial need (defined as the cost of attendance minus your expected family contribution for your chosen school) while unsubsidized loans are not need-based.

Student Level Requirement – To qualify for a subsidized loan, you must be an undergraduate student who is enrolled at least half-time in your university. Both undergraduates and graduate students can apply for unsubsidized loans. 

Maximum Eligibility Period – If you apply for a subsidized student loan, you can only qualify until 150% of the published length of your academic program (roughly six years for a four-year program or three years for a two-year program) while there is no limit on unsubsidized loans. 

Borrowing Limits – Subsidized and unsubsidized loans are both capped, although the former limits you to $23,000 over your educational career. On a yearly basis, subsidized loans generally cap out at $3,500, while unsubsidized loans set the limit higher at $5,500. 

How Are They Similar? 

  • Enrollment Requirement – Both types of loans require that you’re enrolled at least half-time at the educational institution of your choice and actively working toward a degree. 
  • Origination Fees – Both loan types have a small origination fee when disbursed. For October 2018 to October 2019, that amount was 1.062%. 
  • Grace Period – When you qualify for either type of loan, you’ll be granted a grace period on your repayments that lasts for your full degree period and six months after you graduate or are no longer enrolled. 

 Why should I choose Subsidized Loans? 

It’ll largely depend on if you can demonstrate financial need, but you should always apply for a subsidized loan before trying other options. The reason for this is quite simple, though it has several components—over the lifetime of your loan, you’ll pay less with a subsidized loan than with an unsubsidized one. When you’re considering which is best for you, think about the cost savings, as well as how flexible you can be with your repayments over your payment cycle. Here are some of the biggest benefits subsidized loans deliver: 

Grace Period 

When you qualify for subsidized aid, you’ll have a generous student loan grace period before you must start repaying your loans, and it comes with the bonus of having no interest accrue until your repayments start. If you’re wondering, “what is a grace period?”, it’s simply a time frame where you’re not required to make any payments on your loan while you’re in school. 

Lower Interest

While interest rates are set by the Federal government, subsidized aid tends to include most low-interest student loans. In 2019, subsidized interest rates stand at 4.53%, while unsubsidized rates range from 4.53% for undergraduate students to 6.08% for graduate or professional students. 

Flexible Repayment Plans

One of the biggest benefits of federal loans is that they come with a flexible repayment plan. You can usually qualify for most income-driven repayment plans including income-contingent, income-based, and both the PAYE and REPAYE programs. 

Subsidized Loans Common Questions

Even with all this information, there are always some questions that remain unclear when you’re ready to apply. These range from basic questions about borrowing limits to more complex matters. To help make your life easier, we’ve collected and answered some of the most common questions below: 

Am I required to pay back a subsidized loan? 

Yes. While subsidized loans are great for helping keep your overall loan repayments low, they are not free money. You won’t pay interest while you’re in school, but you’ll still be on the hook for the principal you borrow. 

How much can I borrow? 

This depends on your academic year and a few factors, but generally, your yearly borrowing is capped at $3,500, or up to your financial need (whichever is lower). In total, you’ll be able to borrow up to $23,000 in subsidized loans. 

How can I apply for a subsidized loan? 

To get started, you simply need to visit StudentLoans.gov and create an FSA ID. From there, you’ll be able to fill out a FAFSA form and start the process of applying for a loan. 

Can I get my student loan forgiven?

You can. Federal loans qualify for loan forgiveness of outstanding amounts based on responsible repayment and meeting certain criteria. If you qualify by making 10 to 20 years of consecutive payments, you’ll be able to have any outstanding debt forgiven. 

What does the government pay? 

The government only covers the interest payments that accrue while you’re in school and during your six-month grace period. 

Conclusion

Applying for school is already stressful, and if you’re in some financial straits it can be even more complicated. Nevertheless, the US government is happy to help students afford an education and offers programs that reduce your long-term financial burden by assisting with favorable loan terms, forgiveness, and repayment plans. If you’re applying to university, make sure to compare subsidized loans vs unsubsidized loans before deciding. That way, you’ll find the best student loans for your needs before having to choose.