- Understand the difference between subsidized and unsubsidized student loans to make sure you get the most affordable financing for your education
- Federal student loans can help cover the cost of financing for their educational expenses
- Subsidized and unsubsidized loans are the two types of federal student loans
College costs are significantly increasing each year for both in-state and out-of-state education, no matter whether a student can afford it. Most students need help paying for these expenses through subsidized and unsubsidized student loans when their savings alone won’t cover it.
Federal student loans are a popular solution for many struggling students because you can qualify without a credit check or an established credit history. Still, you should be aware of the different types of student loans and how they work.
You can qualifty for unsubsidized or subsidized loans under the federal student loan program. Depending on which loan you have, there can be significant differences in your repayments once your college time ends.
So, it’s helpful to know these differences. You should also know how you qualify for each type of loan, and what you need to do to apply for them.
In this article, we’ll cover
- What is a Subsidized Student Loan?
- What is an Unsubsidized Student Loan?
- What is the Difference Between Subsidized and Unsubsidized Loans?
- Should I Accept a Subsidized Student Loan?
- How do I Apply for a Federal Student Loan?
- Are Private Student Loans Bad?
- How do You Get a Private Student Loan?
What is a Subsidized Student Loan?
A subsidized federal student loan is a loan from the government that does not charge you interest while you are in school. You also get a grace period of six months after your graduate in which you don’t need to pay interest.
Basically the government “subsidizes” your interest payments during your classroom years. In that way, the terms of a subsidized student loan are a bit better for borrowers than unsubsidized student loans.
You also don’t have to pay interest on the loans during any time you defer your loans.
This benefit from subsidized loans can save you a substantial amount of money over the long-term, because it reduces the total amount you pay back for your federal student loans.
The total amount you can borrow through subsidized loans is determined by the school you are attending, but you can’t get more than you can show that you need.
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What is an Unsubsidized Student Loan?
An unsubsidized federal loans is a federal loan that has no requirement to show a financial need in order to qualify. The federal government allows anyone attending an undergraduate or graduate degree program to receive unsubsidized loans, up to certain loan limits.
Unlike with a subsidized student loan, you are still charged interest on the loans while you are school or during the six-month grace period afterward. Interest accrues and is then added to the loan balance once you start repayment.
As interest builds for perhaps a few years, the total cost of borrowing for an unsubsidized loan is higher than the cost for a subsidized loan of the same amount.
The total amount of unsubsidized loans is based on your school, and it dependends on how much it cost to attendend. It also factors in other financial aid you receive.
What is the Difference Between Subsidized and Unsubsidized Student Loans?
Aside from interest charges during your school years, subsidized and unsubsidized loans have other differences. That includes who can borrow, loan limits, how you qualify, associated fees and your interest rate.
Subsidized loans have the following criteria:
- Who can borrow: Only undergraduate students may received subsidized federal loans.
- Loan limits: You can borrow up to $3,500 the first year, $4,500 the second, and $5,500 in years three and four in subsidized loans.
- Qualifications: You don’t need to have a high credit score, but borrowers need to show a financial need in order to qualify.
- Fees: The origination fee for subsidized loans ranges from 1.062% to 1.066%, depending on when the loan was disbursed.
- Interest rates: The U.S. Department of Education pays for interest accruals on subsidized loans, but the interest rate paid by borrowers is 5.05%.
Unsubsidized loans have the following criteria:
- Who can borrow: In this case, both undergraduate and graduate students can get unsubsidized loans.
- Loan limits: For unsubsidized loans, loan limits are higher, at $9,500 for the first year, $10,500 for the second, $12,500 for the third and beyond, and up to $20,500 for graduate students each year.
- Qualifications: Borrowers who are attending school at least half-time may qualify for unsubsidized loans.
- Fees: The origination fee for unsubsidized loans ranges from 1.062% to 1.066%, which is the same as for subsidized loans.
- Interest rates: The interest rate for undergraduate students is 5.05%, and for graduate and professional students it’s 6.6%
Should I Accept a Subsidized Loan?
Subsidized federal student loans are a better choice for a loan from the U.S. Department of Education versus an unsubsidized loan. This is because you can save money on interest.
Interest does not accrue on subsidized student loans when you are in school and so you do not have that charge added to your loan once repayment begins.
Keep in mind that only undergraduate students qualify. With both subsidized and unsubsidized student loans, you must be able to prove financial need. Also know that subsidized loans may not cover all your needs, so you may need unsubsidized funding including in your total student loan borrowing.
However, unsubsidized loans do have advantages, so they are not necessarily a bad choice. The interest rate on unsubsidized loans is generally on par with subsidized loans, but significantly lower than on comparable private student loans.
With unsubsidized loans, you don’t need to provide a credit history to qualify, nor do you need to have an income. For graduate or professional students, unsubsidized loans are the option for federal government financing with its lower interest rates.
How do I Apply for a Federal Subsidized and Unsubsidized Student Loan?
Applying for federal student loans is simple and straightforward. With an application, you can learn what you can receive with federal financing, whether it’s a combination of subsidized and unsubsidized student loans or only one option.
Begin by completing the Free Application for Federal Student Aid (FAFSA), which you can do online. You’ll need to provide information about your residency, which college you’re attending, whether or not you are a dependant, and some details about your financial situation.
Then, based on this information, your college and the federal government will determine what type of financing you can receive. They’ll also determine the maximum amount of the loan.
Are Private Student Loans Bad?
Private students loans are not as ideal as federal student loans because their terms are usually less flexible and their interest rates tend to be higher. They also factor in your credit history to determine your interest rates, whereas federal loans do not. However, private student loans are not necessarily a bad option because they can offer affordable funding for your education.
Federal student loans are the most common way to fund education. But private student loans can offer a number of advantages. Namely, they can fill in the gaps left by federal student loans, That way, you can attend college without the burden of needing an income at the same time you are learning.
Unlike the federal government, which grants loans based on your need, private lenders like banks offer loans based on your credit history. They check whether you are a risk as a borrower and approve your interest rate based on that.
How do You Get a Private Student Loan?
First, research your choices for student loans from several banks, comparing rates and requirements. To apply, you go through the financial insitution itself, not your college. You can complete an application online. It must show your financial ability to repay the loan, your credit score and credit history. In some cases, you may be required to provide your income.
If you’re denied a private student loan on your own, you can add a co-signer to the application to help you meet the requirements.
Private student loans can be a tremendous asset to funding your education. If you can’t meet all your needs with government subsidized and unsubsidized student loans, private loans can help.
The Bottom Line
Subsidized and unsubsidized student loans can both help you in covering the costs of education. And we all know college is expensive. You need to fund the tuition as well as books, and lodging as well as any daily living expenses.
Understanding the differences between the subsidized and unsubsidized student loans can help you make the best decisions for your financial future.
All things being equal, subsidized loans are your better choice. That’s because the costs of interest are lower because you’re not charged interest while you’re in school.
Private student loans aren’t a bad choice – they can help fill in the gap of any funding needs you have leftover after you get federal loans. With all this in mind, you can develop your strategy for paying for your education with the right moves.