Subsidized Loans vs Unsubsidized Loans

November 27, 2022
By AdmissionSight

Subsidized Loans vs Unsubsidized Loans

If you decide to finance your education through the federal government, your student loans will either be subsidized or unsubsidized, depending on which category they are assigned to. When deciding between subsidized loans vs unsubsidized loans, the principal distinction between the two lies in those borrowers of Direct Subsidized Loans being exempt from having to pay interest during specific deferment periods, such as when they are enrolled in an educational program. Interest is accrued and charged continuously for unsubsidized loans.

What are subsidized loans?

What exactly are subsidized loans? The amount of your financial need, as determined by your cost of attendance minus the expected contribution from your family and the amount of other financial aid you receive, will determine whether or not you are eligible for a subsidized loan (such as grants or scholarships). While you are enrolled in school at least half-time or in a deferment period, interest on subsidized loans does not accumulate.

the term "subsidized loan" written on a small black board

Direct subsidized loans can only be obtained by undergraduate students who demonstrate that they require financial assistance. If you are eligible for a subsidized loan, the federal government will pay the interest on your loan. At the same time, you are enrolled in school at least half-time and will continue to pay it for a grace period of six months after you graduate or stop attending school. When your payments are postponed, the government will continue to make them for you.

What are unsubsidized loans?

What exactly are loans that are not subsidized? Loans not based on a student’s financial need are known as unsubsidized loans and are available to both undergraduate and graduate students. Your eligibility is based on the difference between the total cost of attendance and other financial aid forms (such as grants or scholarships). There is a charge for interest during grace and deferment periods.

You are responsible for paying the interest on an unsubsidized loan from the time it is disbursed until the loan is paid off in its entirety, in contrast to a subsidized loan. You can pay the interest as it accrues or allow it to accumulate and be capitalized on its own (that is, added to the principal amount of your loan). Increasing the amount you owe by capitalizing the interest will result in a higher total amount.

There are a lot of advantages to loans that are not subsidized. Students don’t have to demonstrate that they are in financial need to qualify for these scholarships; they can use them for either undergraduate or graduate education. It is important to keep in mind that interest will start to accrue as soon as you take out the loan; however, you won’t have to start paying back the loans until after you have graduated, and unlike with private loans, there will be no credit checks performed when you apply.

What are the interest rates?

The interest rates of subsidized loans vs unsubsidized loans are locked in place for the entirety of the loan’s term. For subsidized loans, the federal government will pay the interest that accumulates. At the same time, you attend school for at least half the time within your grace period of six months and while in a deferment or cancellation period.

A jar of coins beside a book and a graduation cap.

When you take out a loan that is not subsidized, you must pay the interest for the entire loan duration. It is possible to lower the total amount of interest you will have to pay for the life of the loan by making payments while you are still in school and during the grace period. July is when interest rates on new loans are subject to change from one academic year to the next.

How to apply for subsidized and unsubsidized loans?

Even if you are unsure if your choice between subsidized loans vs unsubsidized loans is what you will get, you will still need to submit the Free Application for Federal Student Aid if you want to be considered for either of these loan options (FAFSA).

To be eligible, you must:

  • be a citizen, national or permanent resident of the United States;
  • have a minimum of a half-time course load;
  • not have fallen into default with any previous aid programs or owe a refund to those programs; and
  • maintain satisfactory academic progress.

Direct subsidized loans can only be obtained by undergraduate students who demonstrate that they require financial assistance. There is no requirement that borrowers demonstrate that they need financial assistance to be eligible for direct unsubsidized loans, which can be applied for by undergraduates and graduate students.

Regardless of where you stand when it comes to subsidized loans vs unsubsidized loans, your school will determine how much financial assistance you are qualified to receive for college based on the information that you provide on your FAFSA form. The loans available to you are typically included as part of the financial aid package you receive.

If you are eligible for a subsidized loan, the federal government will pay the interest on your loan. At the same time, you are enrolled in school at least half-time and will continue to pay it for a grace period of six months after you graduate or stop attending school. When your payments are postponed, the government will continue to make them for you.

An important part of your application process for subsidized and unsubsidized loans, is that you and your parents will be asked to provide information regarding their assets and income on this form. Your school will use the information from your FAFSA to determine which types of loans you are eligible for and how much money you can borrow.

You will need your Social Security number or Alien Registration Number, federal income tax returns, pay stubs, or other records of how you earn money, as well as bank statements and records of investment accounts. In addition, you will need to prove that you are a legal resident of the United States. If you apply as a dependent, your parents must also provide the information above.

Regardless of whether you have not made up your mind between subsidized loans vs unsubsidized loans, schools that grant you admission will provide you with a financial aid award letter after you have been approved for your loan. That letter will include details of the total cost of attendance, the amount of award money you have been granted, and the federal aid programs for which you are eligible based on the information you provided on your FAFSA. This section allows you to accept federal student loans and any grants or awards you may have received through work-study programs. Contact your financial aid office if you haven’t received an award letter, but you still need to borrow money for school, and you’re considering an unsubsidized loan.

Should I apply for student loans through the federal government or private lenders?

Before you start looking into different ways to finance your education, you should first investigate whether or not you are eligible for any grants or scholarships that could reduce the overall cost of your education. If you find yourself in a position where you need to borrow money, the best place to start looking for financing is with the federal government.

Whatever you choose in the discussion of subsidized loans vs unsubsidized loans, these loans come with many benefits exclusive to the federal government, such as repayment plans based on the borrower’s income, extended forbearance and deferment periods, and options for loan forgiveness.

Young woman using a laptop while sitting.

If you cannot cover the cost of your education through grants, scholarships, and federal loans, you may be required to take out additional private student loans. Suppose you or your co-signer have credit that is considered to be average. In that case, private student loans typically have higher interest rates and do not offer the same benefits as federal student loans. Private student loans can be useful if you have exceptional credit or have already borrowed the maximum amount you are eligible for under federal student aid programs.

Get in touch with the company that is servicing your loan as soon as possible if you discover that you cannot meet the terms of your repayment plan. Your loan servicer is the best person to help you understand your options for maintaining good standing with your loan.

For instance, you may wish to modify your repayment plan to lower your monthly payment, or you may wish to request a deferment or forbearance. Doing so will enable you to temporarily stop making payments on your loan or reduce the amount you must pay each month. Find out more about your options for deferment and forbearance.

Now that you know the difference between subsidized loans vs unsubsidized loans, your college admission is the next step. At AdmissionSight, you will be guided as needed in that step. You can get all the right information and guidance from experts at AdmissionSight. Start your journey today with an initial consultation.

 

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