Subsidized vs. Unsubsidized Student Loan

subsidized vs. unsubsidized
When it comes to borrowing money to pay for a college education, the federal government is the country’s biggest lender. According to the Consumer Financial Protection Bureau, the total outstanding student loan debt in 2011 was approximately $1 trillion. Federal loans made up most of this amount, at $864 billion, compared to private loans, which totaled roughly $150 billion.

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:

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.

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 percent 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 percent for undergraduate students. The interest rate for graduate and professional students is 5.31 percent. 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 1.068 percent for new loans disbursed as of October 1, 2015. 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 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. Use our free Student Loan Comparison Tool to learn more about the different types of financial assistance that are available to you.

 
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