Federal Direct Unsubsidized Loan vs. Subsidized Loan
Although college is undoubtedly expensive, the federal government helps lift some of the burden of soaring tuition costs through the Federal Direct Loan Program, which includes Federal Direct Subsidized Loans and Federal Direct Unsubsidized Loans. It is critical for student loan borrowers to understand the important differences between these two federal loan types.
Overall, the Federal Direct Subsidized Loan Program has better terms than its unsubsidized counterpart. Eligibility is based on financial information students and their families report on the Free Application for Federal Student Aid (FAFSA). This loan is based on financial need, and the student’s college will determine how much the student can borrow.
As Federal Student Aid describes, one of the most important features of the Federal Direct Subsidized Loan Program is that the U.S. Department of Education pays the interest on this loan under the following circumstances:
- While a student is in school at least half-time
- During the six-month grace period after graduation (in some cases)
- During an approved period of deferment, such as when a student is pursuing another degree or experiencing an economic hardship
It is important to note, for Federal Direct Subsidized Loans disbursed from July 1, 2012 through July 1, 2014, the student will be responsible for paying any interest that accumulates during the grace period. Although earlier loans are not subject to this particular rule, these loans remain among the most desirable in a financial aid package.
The following are important key features of Federal Direct Unsubsidized Loans:
- Not need-based
- Available to both undergraduate and graduate students
- At all times, the student is responsible for paying the accruing interest
- For dependent undergraduates (with parents who qualify for PLUS loans), a maximum of $31,000 (with a $23,000 cap on subsidized loans)
- For loans that are first disbursed on or after July 1, 2015 and before July 1, 2016, a 4.29 percent interest rate
Although the Federal Direct Loan Program provides loans with comparatively favorable terms, loans are loans, and should only be borrowed as necessary. As U.S. News advises, most financial analysts recommend that students borrow no more than $5,000 per year to cover college costs. To further defray costs, students can work part-time by taking advantage of a federal work-study offer (if included in their financial aid package) or seek off-campus employment in the private sector. However, students are urged to cap any working hours to 15 hours per week.
No borrowing guideline will fit every student. However, for students who may need to borrow more than the advisable $5,000 per year, they are advised to research prospective earnings in their expected career. According to analysts, most graduates should be able to comfortably afford to dedicate 10 percent of their gross income (i.e., pre-tax earnings) to student loan repayment.
The federal government provides various student loan repayment plans that can provide low monthly repayment amounts (although, in some cases, the loan may become more expensive over its life). To help calculate federal loan repayment amounts, Federal Student Aid provides a Repayment Estimator.
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