Subsidized and Unsubsidized Loans

So you are on the lookout for financial aid option to fund your studies. Federal student loans can be of use to you and help you cover the substantial costs of higher education. Unfortunately, as there are two types, subsidized and unsubsidized loans, it is not as easy for a student to settle on which options servers their best interests.

In this article we will give you an overall view of both loan types. We will see what they share in common and where they differ. Finally, after pointing the difference beween subsidized and unsubsidized loans, we will close our article by a short paragraph answering the fundamental question: Which loan type is best for me?

Subsidized Loans

When an undergraduate student applies for financial aid through FAFSA, the federal government offers subsidized loans based on their financial needs. The exact amount that a student can borrow is determined by the specific school they applied to. It must not exceed their financial need in any case. The most important aspect of a subsidized loan is that the United States Department of Education pays the interest of the loan. The prerequisite to receive this benefit is that the student must be enrolled at least half time. There is also a time limit on the maximum period of time that a student can receive subsidized loans: A student may not receive them for more than 150 percent of length of their school's program.

The Department of Education continues to pay the interest of the loan during the whole duration of the student's educational program and moreover, extends the benefit for a six month grace period, after they leave the school. As soon as these six months pass, however, the student is required to make the necessary monthly payments of principal and interest.

Finally, loan payments by the student may be postponed further during a period of deferment. It should be noted that any unpaid interest accrued during this period may be added to the principal balance of the loan.

Unsubsidized Loans

On the flip side, an unsubsidized loan begins accruing interest from the first day of the loan disbursement. While the student is not required to pay it during the period they are in school, the grace period after they graduate or any other deferment and forbearance period they are solely responsible for paying it during all said periods.

An unsubsidized loan is available to both undergraduate and graduate students and holds no specific financial need requirement. In other words, you can apply for an unsubsidized loan whether you can demonstrate a financial need or not. In any case, the amount a student can borrow is still determined by the school they applied to and is based on its attendance costs and any other potential financial aid they may receive.

The natural consequence of the absence of a demonstratable financial need is that you can apply for a much bigger loan than you would if you decided for a subsidized student loan. 

What Both Types Have in Common

Both types of loans are provided by the United States Department of Education. Both will aid the student considerably with funding their studies. There is a debt involved in both that they student will be required to repay eventually. Thus, a student that is planning to commit on either type of student loan would do well to ensure that they will have the capacity to pay back the amount of money they borrowed, unless they are willing to face unnecessary complications.

It should be noted that in both subsidized and unsubsidized loans, the school the student applied to has a big say in the amount of money they can borrow. It is recommended that the student will research their school's policy on financial aid so that they know what kind of loan they should expect.

The Difference Between Subsidized and Unsubsidized

After reviewing the two types of loans, a few clear and important differences between subsidized and unsubsidized loans surface.

  • Eligibility: The most obvious difference between the two types of student loans is that a subsidized loan is open only to undergraduate students, whereas an unsubsidized loan is available for both undergraduate and graduate students.

  • Financial Need Requirements: Likewise, while there is a strict requirement to demonstrate a financial need in subsidized loans, that is not the case in unsubsidized loans.  

  • Interest: A subsidized loan does not accrue interest while the student is enrolled at school, whereas an unsubsidized loan begins accruing interest from day one. In the first case, the Department of Education pays the interest while the student attends the school, whereas in the latter, the student is expected to pay the grand total of accrued interest.

  • Time Limit: There is a specific time limit on the maximum period of time that a student is able to receive subsidized loans – namely, 150 percent of the published length of the program they attend. There is no such time limit applied to unsubsidized loans.

  • Loan Size: While in both cases, the school plays a large role in determining the loan's size, the fact that an unsubsidized loan holds no financial need requirements allows for generally larger amounts of money to be borrowed.

Which One is Best For You?

Assuming you are eligible for both types – an undergraduate student with a demonstratable financial need – the clear winners are subsidized loans. They will allow you to save a hefty amount of money since interest will not accrue while you are attending your classes.

Now, in cases where your application is not accepted you will naturally have to resort to unsubsidized student loans or private loans. Generally speaking, federal loans tend to have lower fixed interest rates, but perhaps it would be best if you took the time to research all your available options. In either case your end goal should be to formulate a student loan repayment strategy that will allow you to become debt-free as soon as possible, after you finish your program.