For students

What are the differences between subsidized and unsubsidized student loans?

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For students


If you are considering taking out student loans to pay for your education, know that you are not alone. The truth is that most students today need loans to finance their college educations, and it’s important to know what loan programs are available to you and the benefits they offer in the long run.

The U.S. government offers several student loan programs, and direct subsidized and direct unsubsidized loans are among the most common. Direct subsidized loans are available to undergraduate students and do not collect interest while borrowers are enrolled in college, or while loans are deferred or in forbearance after graduation. Direct unsubsidized loans start to collect interest while students are still enrolled in college.

Unlike private loans, direct loans—whether subsidized or unsubsidized—do not require a credit check or a cosigner in order to qualify.

Knowing the difference between both subsidized and unsubsidized direct loans is important because it can affect the amount of interest you pay, your overall loan balance, and the repayment program(s) you enroll in once you are no longer in school.

Direct Subsidized Loans

The interest rates for subsidized loans are set by the government and fixed, but the amount that you can borrow is limited.

At the present time, annual loan limits are set to $3,500 for first-year students and up to $5,500 for upperclassmen. The total amount that can be borrowed under the subsidized loan program is $23,000. Eligibility is based on the student’s financial need as determined by the Free Application for Student Aid (FAFSA).

The U.S. Department of Education will pay the interest on subsidized loans under the following circumstances:

  • You are enrolled in school at least half-time
  • Your departure from school occurred within the last six months (this also known as a grace period)
  • Your loans are in deferment

Outside of any of these circumstances, you, the borrower, will be responsible for paying the interest on your direct subsidized loans.

There are a few drawbacks to subsidized loans that you should be aware of before deciding to take on them on:

  1. Direct subsidized loans are only for undergraduate students—not graduate students.
  2. If your parents earn too much in income, you may not be eligible.
  3. The amount you can borrow in subsidized loans is capped at $23,000 for your entire undergraduate experience.
  4. Students who are independent of their parents must demonstrate financial need.

Direct Unsubsidized Loans

Like with subsidized loans, interest rates for direct unsubsidized loans are set at a fixed rate by the U.S. government. However, unlike subsidized loans, students are responsible for paying the interest on the loans even while enrolled in school or during periods of deferment or forbearance. Any interest payments that are not made are added to the loan balance, leaving you with a larger loan payment once you leave school.

The government does not pay for interest on unsubsidized loans because they are not based on financial need. All borrowers are expected to pay the loans—both the principal and accrued interest—in full.

With that being said, there are several pros to moving forward with unsubsidized loans that you don’t get with subsidized loans:

  1. Both undergraduate and graduate students are eligible to apply for unsubsidized loans.
  2. There is no proof of financial hardship needed in order to qualify.
  3. Undergraduate students can borrow up to $57,500 total in subsidized and unsubsidized loans.

While eligibility for unsubsidized loans is not dependent upon financial need, students are still responsible for successfully completing the FAFSA in order to receive the funds.

It’s important to remember that borrowers are fully responsible for paying 100 percent of the interest accrued on all unsubsidized loans, no matter whether the borrower is actively enrolled in school, in their grace period, or during a deferment or forbearance.

What are the similarities between subsidized and unsubsidized loans?

While there are a number of stark differences between subsidized and unsubsidized loans, it is important to remember that there are a number of similarities between the two programs as well.

  • Your college or university determines the amount of loan money you are eligible for in both the subsidized and unsubsidized programs. After completing the FAFSA, you will receive a financial aid package detailing how much of each you will receive each semester.
  • You are eligible for federal direct loans for 150 percent of the length of your education program. For example, if you are enrolled in a four-year degree program, you will be eligible to apply for six years’ worth of loans.
  • Undergraduate subsidized and unsubsidized loans disbursed between July 1, 2018, and July 1, 2019, will have a fixed interest rate of 5.05 percent.

How do I receive my loan funds?

Once you receive your financial aid package from your school, you will be required to read through it to understand what subsidized and unsubsidized loans (and other types of financial aid, if applicable) you are eligible for. At this time, you will be asked to accept or reject each loan package.

If it is your first time receiving a federal loan, you will be asked to complete entrance counseling to ensure that you understand the responsibilities attached to taking out a loan. Next, you will be asked to sign an electronic Master Promissory Note legally binding you to the terms attached to the loans.

In most circumstances, your loan funds will automatically be used to pay for tuition, fees, room, board, and other charges related to enrollment in school. If there are any funds remaining, your school will forward those funds to you in your bank account. You can use those funds for books and other school-related incidentals.

Your financial aid office will have further details on how you receive your funds.

When does direct loan repayment begin?

Whether you have agreed to take on subsidized or unsubsidized loans, the repayment period is the same—you are granted a six-month grace period once you graduate, leave school, or drop below half-time

Your unsubsidized loans will continue to accrue interest during this time. You will receive communication from your loan servicer informing you of when your first monthly loan payment is due during your grace period.

What kinds of payment options do I have to pay back my direct loans?

There are several repayment options available to you based on your individual needs. This can include your income, family size, and cost of living.

Your individual needs are reassessed every year so that you don’t need to worry about fluctuations in your income due to changes in jobs, illness, or the size of your family. You will always have reasonable options available to you to ensure you stay on top of your payments.

The Standard Repayment Plan option gives you 10 years to repay your loan, while Income-Driven Repayment Plans can offer you as many as 25 years to pay back your loans. Ask your financial aid office or loan servicer for more information about repayment plans.

How should I prioritize payment for both the subsidized and unsubsidized loans?

Part of smart money management is knowing how to efficiently pay back your loans. That is why it is recommended that you prioritize paying back your unsubsidized loans first over your subsidized loans.

Why? Because the interest on your unsubsidized loans will continue to accrue while you are in school, creating a larger loan payment. Ideally, pay the interest on the unsubsidized loans while still enrolled in school to prevent having a larger loan payment once you graduate.

Should I choose subsidized loans or unsubsidized loans?

Knowing the difference between subsidized and unsubsidized loans can save you several thousands of dollars in student loan payments.

You don’t want to have to take out more than you absolutely need. Sit down and seriously consider what you need in loans to pay for school costs, then compare that against other funds you receive like scholarships, a 529 plan, private loans, and working a job.

It makes the most sense to choose subsidized loans over unsubsidized loans, as much as possible. This will ensure that you are proactive about reducing your student loan payments over the long-term. However, those who do not meet financial need requirements will not be able to consider subsidized loans at all.

If you are unsure about which direct loan program works best for your needs, seek out your loan-servicing program or student financial aid office for more information.

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