The soaring costs of higher education have made student loans a common reality for many students. Federal loans, namely Subsidized and Unsubsidized Student Loans, are the two most sought-after forms of financial aid. However, the distinction between these two loan types is often blurred, leaving students and their families confused about the best financing option for their needs.
This guide aims to shed light on the critical aspects of Subsidized and Unsubsidized Student Loans, helping you understand their unique characteristics, benefits, drawbacks, and how to choose the right one for your situation.
Overview of Student Loans
Before we delve into the specifics of Subsidized and Unsubsidized Student Loans, let’s understand the broader picture of student loans. Student loans are financial aids that help students pay for their education-related expenses, including tuition, room and board, books, and other living costs. They come in various forms, including federal and private loans. Federal loans are funded by the U.S. government, while private loans are provided by private lenders such as banks and credit unions.
What are Federal Student Loans?
Federal student loans are offered by the U.S. Department of Education. They are highly sought after due to their low-interest rates, flexible repayment options, and borrower protections. These loans fall into two main categories — Subsidized and Unsubsidized.
Subsidized vs. Unsubsidized Student Loans: The Key Differences
The primary distinction between Subsidized and Unsubsidized Student Loans lies in the way interest is handled during the in-school period and the eligibility requirements for each.
Subsidized Student Loans: An Overview
Subsidized Student Loans, also known as Direct Subsidized Loans or Stafford Loans, are federal loans available only to undergraduate students with demonstrated financial need. The U.S. Department of Education pays the interest on these loans while the student is in school at least half-time, during the six-month grace period after leaving school, and during any deferment periods. This feature significantly reduces the overall cost of borrowing.
Unsubsidized Student Loans: An Overview
Unsubsidized Student Loans, also known as Direct Unsubsidized Loans or Unsubsidized Stafford Loans, are federal loans available to both undergraduate and graduate students, regardless of their financial need. Unlike Subsidized Loans, the borrower is responsible for all interest that accrues on Unsubsidized Loans from the time the loan is disbursed until it’s entirely paid off.
Who Can Apply for Subsidized Student Loans?
To be eligible for a Subsidized Student Loan, you must be an undergraduate student enrolled at least half-time at a school participating in the Federal Direct Loan Program. Moreover, you must demonstrate financial need, as determined by the information you provide on the Free Application for Federal Student Aid (FAFSA).
Who Can Apply for Unsubsidized Student Loans?
Unsubsidized Student Loans are available to all students — undergraduate, graduate, or professional degree students — regardless of their financial need. The only requirement is that they must be enrolled at least half-time at a school participating in the Federal Direct Loan Program.
How Much Can You Borrow?
The Federal Direct Loan Program sets maximum limits on how much you can borrow annually through a Subsidized or Unsubsidized Loan. It also sets an aggregate borrowing limit.
Loan Limits for Undergraduate Students
First-year undergraduate students who are still financially dependent on their parents can borrow a combined $5,500 in Subsidized and Unsubsidized Loans, with $3,500 of that amount allowed to be in Subsidized Loans. Independent students, and dependent students whose parents don’t qualify for Direct PLUS Loans, can borrow up to $9,500 for their first year of undergraduate study, with no more than $3,500 of that amount in Subsidized Loans.
Loan Limits for Graduate Students
Graduate and professional students have an aggregate limit of $138,500 in Direct Loans, of which $65,500 can be Subsidized. However, since 2012, graduate and professional students have only been eligible for Unsubsidized Loans.
How Does Interest Accrue on Subsidized and Unsubsidized Loans?
One of the significant differences between Subsidized and Unsubsidized Student Loans lies in the way interest accrues.
Interest Accrual on Subsidized Loans
With a Subsidized Loan, the U.S. Department of Education pays the interest while you’re enrolled at least half-time in college, during the six-month grace period after you leave school, and during deferment periods. This means that the loan balance doesn’t increase, helping you save money in the long run.
Interest Accrual on Unsubsidized Loans
On the other hand, interest begins accruing on Unsubsidized Loans as soon as the loan is disbursed, including while you’re enrolled in school, during the grace period, and during deferment or forbearance periods. If you don’t pay the interest as it accrues, it will be capitalized, meaning it’s added to the original amount borrowed. That increases the total amount you have to repay, and you’ll pay more in interest over time.
How to Apply for Subsidized and Unsubsidized Student Loans?
To apply for Subsidized and Unsubsidized Student Loans, you need to first submit the FAFSA. You’ll receive a report detailing how much federal aid you’re entitled to, which may include grants, scholarships, work-study, and loans (Subsidized or Unsubsidized). Be sure to accept any grants and scholarships first, as they don’t need to be repaid. Then, consider any work-study offered before taking on loans.
Making the Right Choice: Subsidized vs. Unsubsidized Student Loans
Choosing between Subsidized and Unsubsidized Student Loans depends on your financial need, eligibility, and the amount you need to borrow.
If you qualify for a Subsidized Loan, it’s advisable to exhaust this option first, as the U.S. Department of Education pays the interest during certain periods, making these loans less costly in the long run. However, Subsidized Loans have lower borrowing limits, and you might need to supplement them with Unsubsidized Loans or other financial aid to cover all your educational expenses.
Remember, while loans can be a lifeline in covering your college costs, they come with an obligation to repay, often with interest. Therefore, it’s crucial to borrow only what you need and consider your repayment strategy even before you take out the loan.
Understanding the nuances of Subsidized vs. Unsubsidized Student Loans can help you make an informed decision about financing your education. While both loan types offer unique benefits, your financial need, eligibility, and academic goals should guide your choice. Remember, these loans, like all forms of debt, come with a responsibility to repay. Therefore, it’s advisable to exhaust all other forms of financial aid, including scholarships and grants, before resorting to student loans.
What are the repayment options for Subsidized and Unsubsidized Student Loans?
For Subsidized and Unsubsidized Student Loans, some repayment options include:
- 20% rule. Plan to repay 20% above what you originally borrowed to account for interest accrual on unsubsidized loans.
- Pay it forward. Make interest payments while in school to avoid interest capitalization on unsubsidized loans.
- Take what you need. Only borrow the amount of financial aid that you need to reduce your debt.
- Graduated repayment. Pay less at first, then payments will steadily increase over time.
- Income-driven repayment. Pay monthly payments based on your income and family size. There are four plans to choose from; income-based repayment, income-contingent repayment, Pay As You Earn, and Revised Pay As You Earn.
- Extended repayment. Pay fixed or graduated monthly payments for 25 years.
Can I change my loan repayment plan after I’ve started repaying my Subsidized or Unsubsidized Student Loan?
Yes, you can change your loan repayment plan after you’ve started repaying your Subsidized or Unsubsidized Student Loan. You can change your repayment plan at any time by contacting your loan servicer.
What happens to my Subsidized or Unsubsidized Student Loan if I fail to make the repayments on time?
If you fail to make the repayments on time for your Subsidized or Unsubsidized Student Loan, the following may happen:
- Your loan may be considered delinquent if you miss a payment.
- Your loan may go into default if you don’t make payments for 270 days (9 months) in a row.
- Your wages may be garnished.
- Your tax refunds may be withheld.
- Your credit score may be negatively impacted.