What Is the Difference Between Subsidized and Unsubsidized Loans?

FT Contributor
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The major difference between subsidized and unsubsidized student loans is whether or not you’re required to pay interest on the loan while you’re still in school. With an unsubsidized loan, you are responsible for paying this interest for the time you’re attending school. However, if you have a subsidized loan, you’re not responsible for interest during this time.

When you only consider interest, a subsidized loan sounds more appealing than an unsubsidized loan. However, there are certain qualifications you must meet to be eligible for a subsidized loan and there are other potential drawbacks to this type of student loan. Before you apply for loans, it’s important to understand the eligibility requirements and other differences between these two loan types.

Subsidized Student Loan

A direct subsidized loan is a type of federal loan that’s available to eligible students based on need. With this type of loan, you don’t pay interest during your time at school as the borrower. Not everyone qualifies for this type of loan so you must be able to prove you meet specific financial-related eligibility requirements when applying. However, these requirements aren’t related to your credit score and there’s no minimum score you need to qualify.

Do Subsidized Loans Have Interest?

Subsidized loans are different than unsubsidized loans because the federal government pays the interest for you while you’re attending school, at least as a half-time student. However, as soon as you’re no longer considered an active student, interest will begin to accrue at the rate you agreed on in the loan terms.

With a subsidized loan, there’s a maximum amount of time you can qualify to have your interest waived. Generally, you can’t receive this loan for more than 150% of the published length of your program. The length of your program is the amount of time the school expects the average student to take to earn the degree in question.

Unsubsidized Student Loan

If you have an unsubsidized student loan, you are required to pay interest during the time you’re attending school. If you don’t make interest payments while you’re in school, the interest you owe is added to the loan balance. These types of student loans are also offered by the federal government, but the eligibility requirements are not as extensive.

To apply for an unsubsidized student loan, you must complete a Free Application for Federal Student Aid (FAFSA) and submit it to your school’s financial aid office. This form determines the loan amount and terms you qualify for. Even if you qualify for a subsidized loan, the federal government may also provide you with an offer for an unsubsidized loan. You’ll need to review the loan terms and amount for each and decide which type of loan is right for you.

Direct Unsubsidized Loan Interest Rate

When reviewing the interest rates for unsubsidized loans, keep in mind they’re different for undergraduates and graduates. According to the U.S. Department of Education, the current unsubsidized loan rate for an undergraduate is 4.53% while the loan rate for a graduate or professional student is 6.08%. These interest rates are for loans that were first disbursed on or after July 1, 2019, and before July 1, 2020.

The latest interest rates show a slight decrease from last year’s rates, which were 5.05% and 6.60%, respectively. When you agree to loan terms for an unsubsidized loan, the interest rate is fixed for the life of the loan and will not fluctuate.

Subsidized Loan vs Unsubsidized Loan: Which Is Better?

While subsidized loans are more desirable since interest is deferred until after graduation, you may not qualify for this type of loan unless you can demonstrate financial need. It’s also important to remember that these types of loans are not eligible for graduate or professional school.

The loan amounts for subsidized loans are also lower than unsubsidized loans. If you qualify for both types of student loans, it’s important to understand the benefits and drawbacks of each when deciding which loan terms are right for you.

Pros and Cons of Subsidized Student Loans

Temporarily waived interest rates are the greatest benefit to obtaining subsidized loans. However, there are caps on these types of loans so they may not be able to cover all your school-related expenses.

You must meet eligibility requirements with the federal government to be offered a subsidized loan, which includes attending undergraduate school at least half-time. If for some reason the minimum credit hours aren’t being met or you no longer qualify for this type of loan for another reason, your interest is no longer waived and can begin to accrue unexpectedly. It’s important to only choose this type of loan if you know you can continue to meet the qualifications as you attend college.

Pros and Cons of Unsubsidized Student Loans

While unsubsidized loans will obviously incur more interest and don’t give you a break on this interest while in school, these types of loans may offer more flexibility. The loan amount is often higher with unsubsidized loans, so it’s more likely to cover all your expenses while you’re in school. You can also use these types of loans while you’re attending either undergraduate or graduate school.

If you qualify for a subsidized loan but the loan amount offered isn’t enough to cover your expenses, you may be able to use an unsubsidized loan in conjunction with the subsidized loan to pay for school. Using both of these loans together can ensure you have a high enough loan amount to cover your education-related expenses. However, keep in mind the unsubsidized loan amount is accruing interest, even while you’re in school.

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