Researching, choosing, and deciding on a student loan can be confusing. There are so many options. Are some better than others? For example, how about subsidized vs unsubsidized student loans? Which one should you get based on their differences?
One isn’t necessarily better than the other. As with so much on this topic, which one is better is subjective and totally up to your own personal circumstances.
While one loan may be the better option for you, the exact opposite might be true for someone else.
So I’ll take some time and break it down. First, I’ll provide a detailed description of each loan and then describe the differences between subsidized vs unsubsidized student loans.
First, some key points or highlights to remember, thanks to the Department of Education.
- Both subsidized and unsubsidized student loans are provided by the federal government
- The official names of these loans are Direct Subsidized Loans and Direct Unsubsidized Loans
- You will also see these loans referred to as Stafford Loans or Direct Stafford Loans
- You may not be eligible to receive the full loan limit
- There are eligibility requirements for both subsidized and unsubsidized loans
- There are loan fees charged on top of interest for both
- Interest rates are set by the government
- There is no minimum credit score requirement
- You have several different repayment options with both
Subsidized vs Unsubsidized Student Loans: The Key Differences
Both subsidized and unsubsidized student loans can be used to cover the cost of higher education at any of the following:
- Four-year colleges and universities
- Community colleges
- Trade schools
- Careers schools
- Technical schools
However, if you are considering a federal student loan to pay for college there are some important differences between these two loans that you’ll need to understand first.
But before you dig deep into the subsidized vs unsubsidized student loans debate, make sure you qualify for a Federal Direct Loan.
Applicants for both loans must:
- Be currently enrolled in a participating school at least half-time
- Be steadily maintaining an acceptable academic progress
- Be a U.S. citizen or eligible non-citizen
- Have a valid Social Security
- Have earned a high school diploma or the equivalent
- Not be in current default with any existing federal loans
- Be registered with the Selective (this includes males 18 to 25 years of age)
One other thing applicants for either type of loan must do is fill out the Free Application for Federal Student Aid (FAFSA).
In some states, it’s mandatory for graduating high school students to fill this out, so this step may already be done.
One of the main purposes of the FAFSA is to determine if any and how much financial need you might qualify for. Having said that, even if you and your family are in a position to pay for much of your education—or you are in line for grants, scholarships, or private loans—it’s still worth filling out this form. You still may be in line for some non-need-based aid.
Despite that, some schools require the form before making any financial aid decisions.
What is a Direct Subsidized Loan?
According to Sallie Mae, with a subsidized loan the bank or the government—when we are talking about Direct Federal Loans—pays your interest for you while you attend school.
This only applies if you are attending at least half-time, while you are in your post-graduation grace period, and if you have a need for a loan deferment. That means the bank or the government is waiving some of your repayment responsibilities when under the above-mentioned conditions.
- For example, if you take out a Direct Subsidized Loan for $7,500 at the beginning of your 4 years in college or university, your balance owed will still be $7,500 when you graduate.
However, as soon as you repay your loan, your interest is no longer withheld, and now you are responsible for paying back the original amount of the loan, with interest now accruing.
The only students who are eligible for Direct Subsidized Loans are those who can prove they have financial need, as this loan is geared toward lower-income borrowers.
Eligibility for Direct Subsidized Loans:
- Lower-income (based on the income and assets of both you and your parents)
- You must be an undergraduate
Direct Subsidized Loans: The Benefits
As mentioned above, one of the major benefits of this loan is the fact the government is paying your interest while you’re in college or university—as long as you are maintaining at least half-time status.
When you finish your 4 years, you are granted a 6-month grace period before you need to begin repaying your student loan.
Once you have begun repaying your loan, if you run into financial difficulties and can’t make payments for a time, you may be eligible for deferment and forbearance. If so, during that period, your interest would again be paid by the government.
- The government pays your interest while you are in school
- After you graduate, there is a 6-month grace period before you need to repaying
- The government will also pay interest if you have a period of deferment and forbearance
- Interest is capped at 4.45%
Direct Subsidized Loans: The Disadvantages
If you are a graduate student, you cannot apply for a Federal Direct Subsidized Loan.
Depending on the financial status of you and your family, you may not be able to qualify for this loan. So if your family’s income is above a certain level, you can’t apply.
To qualify, you need to show “demonstrated need” for financial aid.
How do you calculate this need?
You find out your Cost of Attendance (COA). Then you need to determine your Expected Family Contribution (EFC). Your EFC is subtracted from your COA to arrive at how much need-based financial aid you are eligible for.
- COA – EFC = Demonstrated Financial Need
The amount that you can borrow under a subsidized loan is also lower than the amount for an unsubsidized loan. Federal subsidized loans have a cap of $23,000 for your four years in total.
What is a Direct Unsubsidized Loan?
It is not necessary to prove a need for financial aid for a Direct Unsubsidized Loan. Why? Because there isn’t any financial aid offered with this loan.
Since the government does not pay the interest on a Direct Unsubsidized Loan, your—and that of your family—income status is irrelevant.
The Direct Unsubsidized Loan is available to both undergraduate and graduate students
Direct Unsubsidized Loans: The Benefits
- The criteria and eligibility requirements for an unsubsidized loan are much lighter.
- Whereas only undergraduates can apply for the subsidized loan, both undergraduates and graduate students can apply for an unsubsidized loan.
- The loan limit on an unsubsidized loan is a total of $31,000 spread over your four years of college or university.
- You never need to make payments while in school.
- For the 2019-2020 academic year, the fixed interest rate is 4.53% for undergraduate students
- Also for the 2019-2020 academic year, the fixed interest rate is 6.08% for both graduate and professional students.
- You have a variety of different repayment options, including some that are income-based.
Direct Unsubsidized Loans: The Disadvantages
With an unsubsidized loan, you don’t get the aid of the government paying your interest while you are in school—or at any other time.
If, for some reason, you fail to pay the interest, perhaps during a grace period or a deferment or forbearance period, your interest continues to accumulate. It will be added to the principal amount of your loan.
Subsidized vs Unsubsidized Student Loans: Different or Mostly the Same?
Clearly, there is a difference between subsidized and unsubsidized loans. And those few differences are significant ones.
› Subsidized Loans: The Differences at a Glance
- Only undergraduate students are eligible
- There is a requirement for demonstrated financial need
- The maximum loan amount is $23,000
- The government pays your interest while you are in school, during your grace period, and during any periods of deferment or forbearance
› Unsubsidized Loans: The Differences at a Glance
- Both undergraduate and graduate students are eligible
- No need to demonstrate financial need
- Your unsubsidized loan interest is not paid by the government
- The maximum loan amount is $31,000
› Subsidized and Unsubsidized Loans: The Similarities
Regardless of which loan you are after, it is the school of your choice who determines the amount you can ultimately borrow.
Federal Direct loans, whether subsidized or unsubsidized, have a maximum eligibility period that is equal to 1.5 times the length of the course or program you are enrolled in. So, as an example, if you are taking a complete, four-year undergraduate program, you are eligible to receive a six-year loan.
The interest rate is the same for both loans. Undergraduates with either will rate of 4.45% as of this .
Regardless of which loan you ultimately get, the fee is the same. The fee is charged against the total and calculated 1.069% for loans disbursed after Oct. 1, 2016, and before Oct. 1, 2017. For loans taken on or after Oct. 1, 2017, and before Oct. 1, 2018, the fee is 1.066%.
In the end, which loan you can qualify for may be out of your hands. However, if you can get the subsidized loan, it is worth it. Not having interest accrue while you are in school is a significant monetary relief.