Subsidized vs. Unsubsidized Student Loans: The Parent and Student Guide

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College students around the country ask the same question every year: What is the difference between subsidized and unsubsidized student loans?

Students borrowing federal money for their education are required to go through Student Loan Entrance Counseling. The session provides students information on:

  • The different types of student loans
  • How the process of applying for a loan works
  • How to plan for repayment of the loan
  • How to avoid defaulting after borrowing money for school

Why is it then that stats show that two-fifths of students have no clue what they were taught after finishing loan counseling?

  • The answer lies in the fact that the counseling is mandatory and most students see it as a burden standing between them and their funding, not a learning opportunity.

If you are really interested in understanding the difference between subsidized vs. unsubsidized student loans, this thorough guide will provide all of the information you seek.

Subsidized vs Unsubsidized Student Loans 101

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Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

There are a few things that both types of loan have in common.

  • First, they are both provided by the federal government to help students further their education.
  • Better known as Stafford Loans, both options (currently) have a 5.05% interest rates and have the same eligibility period.

They also come with the same fees.

  • Any loans disbursed on or after Oct. 1, 2017, but before Oct. 1, 2018, are assessed at 1.066%.
  • The rate was a bit higher, set at 1.069% for all loans disbursed on or after Oct. 1, 2016, but before Oct. 1, 2017.

One final similarity is the FASFA eligibility requirement.

  • Whether borrowing subsidized or unsubsidized funds, all student borrowers must fill out a FASFA form each year.
  • This information allows their individual school to decide what they qualify for and send out an award letter.

The chart below explains some of the key differences between the two:

Unsubsidized Student Loans Subsidized Student Loans
Available for both undergraduate and graduate studies Available for undergraduate studies only
Not based on financial need (you can qualify even if you have a high income) Based on financial need (income restrictions apply)
Generally, interest is charged from the time the loan is taken out until the loan is paid back. There are a few exceptions in which interest may stop accruing for a period of time. Interest is usually not charged during these times: while you are in school at least part-time, for the first six months after graduation, and during certain periods of repayment.
The amount students can borrow is based on a couple of factors, including cost of attendance and other financial aid received. The amount borrowed may not exceed student’s financial need.

What is a Direct Subsidized Loan?

Direct Subsidized Stafford Loans are available for undergraduate students at a fixed interest rate.

  • This interest rate is relatively low (currently 5.05% for the 2018-2019 school year.)
  • These loans are not for everyone.
  • They are only available for students whose cost of schooling outweighs their EFC—expected family contribution.

Students must also be a U.S. citizen, national, or eligible non-citizen and have received a high school diploma or GED.

You must also be in school at least part-time to receive Direct Subsidized funding. If you are in default on other federal loans, you will not be able to borrow through this program.

  • One of the ‘pros’ to this type of loan is that although interest will be added, the government pays it while the student is still attending classes.
  • Other types of loans do not offer this option.

Another benefit of Direct Subsidized Loans is that the related rules offer borrowers who get into financial trouble ways to get back on track.

There are some drawbacks to borrowing money for schooling through the Direct Subsidized Loan Program.

  • The first is that the amount you can borrow is limited.
  • This is a real hurdle for students who aren’t able or allowed to work while in school but do not have financial support from other sources to take care of basic needs.

Generally, loan limits are capped as outlined below:

  • 1st Year- $3,500
  • 2nd Year- $4,500
  • 3rd and 4th year- $5500

Even if your financial needs exceed the amounts listed above, Direct Subsidized Stafford Loans cannot be raised.

  • There is a cap of $23,000 in total.

Other cons include the fact that not everyone qualifies and, you are still acquiring debt.

How to Apply for a Direct Subsidized Student Loan

Students may apply for a Direct Subsidized Student Loan through the Free Application for Federal Student Aid (FASFA).

No credit check is required, and no co-signers are needed to receive funding.

Direct Subsidized Student Loan Repayment Options

Once students have been out of school for six months, they will be required to begin repaying their loans.

There are many different repayment plans available for students after they graduate or stop attending.

These include:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • (PAYE) Pay as You Earn Repayment Plan
  • (REPAYE) Revised Pay as You Earn Repayment Plan
  • (IBR) Income-Based Repayment Plan
  • (ICR) Income Contingent Repayment Plan
  • Income-Sensitive Repayment Plan

Your student loan lender can help you decide which is the right plan for you based on your individual circumstances.

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What is a Direct Unsubsidized Loan?

If you’ve read all of the information above, then you know that one of the main facts when comparing Direct Subsidized vs. Unsubsidized Student Loans is income.

  • You must demonstrate financial need for Subsidized loans.
  • With Direct Unsubsidized Stafford Loans, income does not matter.
  • Neither does undergraduate status.

Those seeking graduate and professional degrees are equally eligible to apply for a Direct Unsubsidized Loan.

The loan limits are also higher (with a cap of $31,000). This means that student borrowers are able to borrow more money for their education than they can when taking out need-based loans.

  • A negative is that although you still get periods of loan deferment when you are in school and during the six months after you graduate, interest will still accrue on an Unsubsidized Stafford Loan.
  • Borrowers do have the option of paying this interest as they go (even when loans are deferred) so that the total amount of the loan is reduced.

Although these types of loans are not as favorable as Subsidized Loans because of constant accrual of interest, they are a better option than private loans.

  • The interest rate might be adding up continually, but it will most likely be lower than those attached to a loan from the bank.

Like other types of federal loans, one of the major ‘cons’ comes not with borrowing but defaulting.

  • The government has the power to garnish 15% of your wages without needing approval from the court, can intercept your tax refunds, and can even garnish 15% of Social Security disability and retirement benefits in the future.

For this reason, it is crucial that borrowers not only understand Subsidized vs. Unsubsidized student loan differences but also be reasonable about borrowing money in general.

Which Type of Loan Should I Take?

Which type of loan you should take really depends on a few factors.

  • What kind of student you are (undergraduate, graduate, etc.)
  • If you meet the income-based requirements
  • How many other sources you have available to finance your education (i.e., scholarships, grants, etc.)
  • If you will be able to keep up with the interest and payments on the money you borrow
  • What options are available for repayment of the loan
  • What you plan to do if you get into a financial bind or hardship

In only certain (and often rare) cases can loans be discharged or forgiven.

  • Although there are many ‘internet myths’ that say otherwise and companies that offer to help you have your student loans wiped clean, federal guidelines do not allow this for the most part.

For this reason, you have to be very cautious of how much you try to borrow, and through what programs you obtain the funding.

Subsidized vs. Unsubsidized Student Loans- Leslie’s Story

Leslie’s story is an excellent example of the importance of educating oneself on student loans so that you don’t make costly mistakes in the future.

Leslie started out as an education major at a local community college.

Her first two years of school, she received income-based Pell grants that covered her entire cost of schooling, including tuition and books.

After she graduated with an Associate Degree, she wanted to pursue her Bachelor’s in education as well.

  • Unfortunately, the nearest four-year university was over two hours away from her rural town.
  • With no reliable transportation or way to move, Leslie decided that she would have to attend school online.

She found an online program and was accepted quickly.

  • Although she still qualified for some grants, the cost of the expensive online program far outweighed the cost of attending school locally.
  • The tuition was not even covered, so Leslie was advised to apply for loans when filling out her FASFA.

Because she fell under the low-income guidelines, Leslie was able to receive the maximum Subsidized Loan amount.

  • Unfortunately, it still was not enough to cover all of her costs.
  • She ended up having to take out a Subsidized loan as well.

When Leslie graduated, both of her loans went into a six-month deferment period.

  • The Direct Subsidized Loan did not accrue interest during this time. This was not the case for the Unsubsidized student loan.

Leslie found a teaching job, but the pay was much lower than she had expected it to be.

Worried that she might default on her loan, Leslie reached out to her lender to see about various repayment options.

  • Leslie was placed in an Income-Based Repayment Plan (IBR).
  • Although this did not change the amount that she owed or wipe away any of her debt, it did lower her monthly payment required to a much more reasonable amount.

After a few years of teaching, Leslie began to make more money and was able to pay down her loans.

  • She put most of the funds on the Unsubsidized Loan since it was accruing the most interest.

At this point, she decided to go back to school to become a school leader.

  • From her loan counseling session, she knew that Subsidized Loans were not an option for graduate students.
  • Before adding more Unsubsidized Student loan debt to her plate, she decided to take a long hard look at the cost of earning another degree versus how much she would likely make as an educational leader once she finished graduate school.

After crunching the numbers, Leslie decided to work on paying her current debt down before taking on more.

In the end, she was able to go to school and accomplish her dream of earning a master’s degree.

Because she did it the ‘smart way,’ she was able to pay off her loans and avoid snowballing debt like many of her classmates and colleagues.

Conclusion: Subsidized vs. Unsubsidized Student Loans Borrowing Game Plan

Now that you understand the difference between Subsidized vs. Unsubsidized student loans, you might be ready to put a borrowing plan in place.

Although Leslie’s story shows a common scenario, every individual situation is different.

Many student borrowers follow the outline below:

  1. File the FASFA by the deadline.
  2. Apply for any grants or scholarships that would cancel out the need to borrow loans of any type.
  3. If you are eligible to borrow Direct Subsidized Loans, go with this option first.
  4. If you do not qualify for Direct Subsidized Loans or have outstanding financial needs, consider Direct Unsubsidized Loans
  5. Private and Parents PLUS Loans might be worth looking into if you reach the Direct Loan limit.
  6. Once you have been awarded a loan, your school will contact you about funding and provide information about your lender.

Take time to write down your thoughts on each type of loan and take an honest inventory of what you feel your best options are.

Then create your borrowing game plan. Doing so will allow you to stay smart when it comes to the lending process.

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