Subsidized vs. Unsubsidized Student Loans
When it comes to borrowing money to pay for a college education, the federal government is the country’s biggest lender. The most popular type of aid is the Federal Direct (also known as Stafford) Loan Program. Both subsidized and unsubsidized loans are available for students attending the following postsecondary institutions:
- Private or public colleges or universities
- Community colleges
- Technical or vocational schools
- Trade or career programs
Applying for federal student aid can be a daunting process, especially if you’re unfamiliar with the terminology used to describe student loans. As you research the different types of loans issued by the U.S. Department of Education, you’ll undoubtedly come across the terms “subsidized” and “unsubsidized” loans. How do these types of loans compare, and which one is right for you? Understanding the differences between the two will help you make smart choices when you’re planning your funding strategy for college.
Subsidized loans are financially supported by the federal government. The U.S. Department of Education helps low-income borrowers cover the cost of the loan by paying for the interest while you’re attending college (you must be enrolled at least half-time to qualify). If you need to apply for a deferment, or a postponement of your loan payments, the government will cover the interest while the loan is deferred.
If you had a Direct Subsidized Loan that was scheduled to be paid out for the first time between July 2012 and July 2014, you must cover the cost of interest during the first six months after graduation – a time known as the “grace period.” If your loan was disbursed for the first time before 2012, the government will cover the cost of interest during the grace period.
Subsidized loans are based on financial need and available only to undergraduate students. The school you attend will determine how much aid you receive based on the cost of your college-related expenses and the amount of funding that you’re receiving from other sources.
What is an Unsubsidized Loan?
Unlike subsidized loans, unsubsidized loans are not based on financial need. Both undergraduates and graduates can apply for Direct Unsubsidized Loans. While the federal government backs unsubsidized loans, the government does not pay for interest at any time. The borrower is responsible for paying the interest throughout the life of the loan. While you’re attending school, or if your loan is in deferment, you have the option not to pay interest. However, the unpaid interest will be added to the principal, or the final balance that you owe.
How Long Can I Receive Financial Support?
As of July 1, 2013, students who are applying for federal aid have a “maximum eligibility period” for subsidized loans. The maximum eligibility period is 150% of the length of the program you’re enrolled in. For instance, if you are enrolled in a four-year program, you would be eligible to receive subsidized loans for six years.
If you transfer to a new program, your maximum eligibility period should reflect the length of that new program. For example, if you transfer from a two-year program at a community college to a four-year program at a university, your maximum eligibility period should increase from three years to six years. However, if you were to transfer from a four-year program to a two-year program, you might become ineligible for Direct Subsidized Loans if you had already received loans for two years.
With unsubsidized loans, there is no time limit — or maximum eligibility period — on how long you can continue to receive Direct Loan funds, as long as you are still enrolled in school at least half-time.
How do the Interest Rates Compare?
The interest rates for subsidized loans are comparable to the rates for unsubsidized loans. As of July 1, 2016, the rate on new subsidized and unsubsidized loans is 3.76% for undergraduate students. The interest rate for graduate and professional students is 5.31%. For all of these loans, interest rates are fixed, meaning that they do not increase over the duration of the loan.
For both subsidized and unsubsidized loans, there is a loan fee of 1.069% for new loans disbursed as of October 1, 2016. A percentage of the fee is deducted from each of your loan disbursements.
Which type of loan is right for me?
When you apply for federal financial aid, the information in your FAFSA (Free Application for Federal Student Aid) will determine whether you are eligible for a subsidized or an unsubsidized loan. In general, you may qualify for a subsidized loan:
- If you are an undergraduate student
- If you are enrolled in a program that leads to a degree or certificate
- If you are attending a school that participates in the Direct Loan Program
- If you can demonstrate financial need
If you are not eligible for a subsidized loan, you may qualify for an unsubsidized loan regardless of your financial need. Graduate students, professional students, and undergraduates can qualify for unsubsidized loans.
How do I apply?
The first step in applying for subsidized or unsubsidized Direct Loans is to fill out the FAFSA. Once you’ve completed the application, your school will decide how much money you need to borrow based on your estimated family contribution, or EFC. The EFC is a calculation that reflects your family’s income (or your own, if you are financially independent), your assets, and your other financial obligations.
The financial aid package you receive from your school will include any loans that you’ve been awarded. To make sure you’re considered for all federal loans and grants, you should complete the FAFSA as soon as possible when you apply to college. Some forms of government financial aid are awarded on a first come, first served basis, so it pays to apply early.