While private student loans are an option, many college students opt for federal student loans. These loans, which are secured by the government, will either be direct subsidized loans or direct unsubsidized loans. If you’re anything like most college students, you probably don’t know the difference between the two. Choosing the right kind of student loans can save you money in the long run.
Here’s what you need to know about subsidized vs unsubsidized student loans so that you can make the best financial choice for your student loans when it comes time for repayment.
Subsidized loans are available to undergraduates. These loans are available to help lower-income students who want to complete their college education but don’t have the funds to do so on their own.
The biggest perk of these loans is that they don’t accrue interest that you’re responsible for paying while you’re in school or during your deferred period after graduation. In fact, the government pays the interest fees while you’re in school, as long as you’re enrolled at least part-time. This means that if you get a subsidized loan as a freshman for $20,000, after four years, the loan balance will still be $20,000.
There’s also no minimum credit score requirement, which means that as a student, qualifying for this type of loan is pretty easy.
The loan rates are fixed, but there’s a limited amount as to how much money you can borrow. In order to be eligible for a subsidized loan, you must complete the Free Application for Student Aid (FAFSA) and have a financial need.
To wrap things up, here are the pros and cons of subsidized loans.
- You’re not responsible for paying the interest
- Interest is also repaid by the government during deferment and forbearance
- Government may also pay interest for certain repayment plans
- Six-month grace period until payments are due
- Loan balance doesn’t get bigger
- Not available for graduate students
- Must have a financial need
- Lower loan amounts are available
The other type of loan is an unsubsidized loan. This loan is different from a subsidized loan in that the government does not pay the interest. In fact, students are responsible for making interest payments as soon as the loan is taken out. If the interest isn’t paid, the total is added to the principal amount.
This means that your loan will grow over time if you don’t pay the interest fees. This can result in thousands of dollars in accrued interest.
The government doesn’t pay interest on unsubsidized loans because they aren’t based on financial need. This means that you’re entirely responsible for paying the interest and the principal balance.
As a quick wrap up, here are the pros and cons to keep in mind for unsubsidized loans.
- Available for both undergraduate and graduate students
- Higher loan amounts are available
- Don’t have to prove financial hardship
- Responsible for paying the interest
- Loan balance will grow if interest isn’t paid
Similarities Between the Loans
While the biggest difference between subsidized and unsubsidized loans is how interest accrues and who is responsible for paying it, these loans are quite similar.
For example, in both instances, your school determines how much money you’re eligible to borrow. After you submit your FAFSA and other documentation, your school offers a financial aid package that determines how much you can receive in subsidized and unsubsidized loans.
Both loans also have the same loan fee which is 1.066% of the total loan. This is charged to the aggregate total.
Now that you know the ins and outs of subsidized and unsubsidized loans, it’s important to know how to prioritize your loan payments. As a rule of thumb, it’s best to repay your unsubsidized loans before paying back subsidized loans. This is because the sooner you repay unsubsidized loans, the less interest you have to pay. Be sure to discuss with your loan servicer to ensure that your payments are going towards your unsubsidized loans first. This way you can prevent having to pay thousands of dollars in interest.
While you have no say in the amount of money you’re eligible for in subsidized and unsubsidized loans, it helps to know the difference between the two. By understanding how interest accrues and how it must be paid for each loan type, you can save yourself money and frustration now and long into the future.