Subsidized Student Loans: Pros and Cons [Review]

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Subsidized Student Loans: Pros and Cons [Review]

With the cost of going to college at an all-time high, student loans (federal and private student loans) are no longer a facility. Instead, they have become a necessity. As a result, every seven out of ten students in the US have some level of student debt. Because of this, subsidized student loans are on the rise, with the government and other institutions helping people out by paying part of the loan amount.

Student loan debt has exceeded credit card debt and accumulated car loans in terms of the overall amount owed. Today, Americans owe a staggering $1.6 trillion in student debt.

What Are Subsidized Student Loans?

Subsidized student loans are any institution or government-supported loans that make it so you don’t have to pay interest on your debt for some time. Basically, this reduces the overall cost of the loan and brings your total debt down.

However, despite the benefit they provide, and the fact that more students need financial aid, not everyone can get subsidized student loans. These types of loans come with certain conditions, the primary one being that you need to be in financial need, and provide proof of it.

How Do Subsidized Student Loans Work?

Despite what people might tell you, a loan subsidy is never provided on the actual borrowed amount, but only on the interest.

When you borrow money, the borrowed amount is the principal amount, and you are charged interest on it. The amount of interest is calculated based on factors like the number of payments, loan longevity, loan amount, and the lender’s own demand, among other things.

When you make a loan payment, a percentage of it goes to pay off your interest, and the rest goes to the principal amount. If you default on a payment, the interest charges are usually added to the principal amount, which increases the amount you owe, as well as, the subsequent interest payments.

With a subsidized student loan, defaulting on a payment does not increase your total loan amount, and each successful payment reduces your principal amount. Institutions may offer this as part of a flexible benefits plan, while the government offers it to anyone who requires tuition assistance.

What is a Stafford Loan?

Also known as William D. Ford Federal Direct Loans, Stafford loans are a government-backed direct loan program. If a student defaults, the government is responsible for paying back the lender. They are, by far, the most common type of federal student loan.

This type of loan has fixed interest rates, which are lower, as compared to private loans. There is no need for credit history and you can opt for loan forgiveness programs if you’re unable to pay back the full amount.

Subsidized Stafford loans have a few borrowing limits. For example, a first-year financially dependent undergraduate student (of any degree program) can take out a Stafford loan worth $5,500 in total and a maximum amount of $3,500 from this loan can be subsidized.

Elements of a Stafford Loan

Here are the key elements of a Stafford student loan:

  • It’s only available to undergraduate students.
  • There is a fixed interest rate of 2.75%.
  • There is a loan origination fee of 1.069%.
  • There is a six-month grace period, during which you don’t have to make any payments.
  • You must provide proof of financial need by filling out the FAFSA (Free Application for Federal Student Aid).
  • If you’re still in school, your interest is subsidized completely.

There is also a Stafford loan option for graduate students, but it is unsubsidized.

What Qualifies You to Receive a Subsidized Student Loan?

There is a relatively strict qualification policy for subsidized student loans. This is mostly because subsidizing thousands of dollars’ in federal loans can add up to millions, or even billions. Lending organizations and the government need strict qualifying criteria to make sure that only those who require it as a necessity, receive it.

The following is the criteria for qualifying for a subsidized student loan:

  • First and foremost, you need to be a citizen of the United States, a national, or at least a permanent resident.
  • You need to be enrolled at least half-time in an undergraduate program (from a certified college or university) which leads to you getting a degree or certification. Graduates, however, are not eligible for subsidized student loans.
  • You need to provide proof of financial need through the FAFSA. This means documentation regarding you and your family’s income, and proof that the loan repayment amount exceeds your repayment capabilities. You’ll need to fill out a FAFSA form and apply for the subsidized student loan with it. The amount you receive may be limited according to the cost of the college you apply to.
  • You need to be clear of any previous student loans. This means that you shouldn’t have defaulted on a student loan(s) before, or owe a refund.
  • Finally, you need to show your repayment capability through your academic performance. This is especially important when lending organizations are sponsoring your subsidized student loan.

If you don’t qualify, you can apply for an unsubsidized student loan, and then sign up for student loan forgiveness programs.

Subsidized vs. Unsubsidized Loans

When you take out federal student loans to pay for school, the loans are either Direct Subsidized Loans or Direct Unsubsidized Loans. Direct Subsidized Loans are eligible for all of the different repayment plans offered by the U.S. Department of Education (federal government).

The main difference between a subsidized and unsubsidized loan is who initially pays off the interest amount. A subsidized loan gives students a six month grace period after graduation, during which their interest payments are taken care of by the lending party. With an unsubsidized loan, the government or sponsor organization doesn’t pay the interest amount.

Furthermore, if you apply for an unsubsidized loan, you don’t need to show proof of financial need.

Pros of Subsidized Student Loans

Here are some of the benefits of choosing a subsidized student loan:

  • The US government or the sponsor organization pays the interest on your student loan during your studies and up to 6 months after you graduate.
  • Some plans can have repayment options that can be amended to assist you in easy repayment.
  • If you default on your payment after the 6-month mark, the interest owed will not accrue in your principal account, which means that the total cost of the loan will remain the same.

If you’re a student who is finishing up college and transitioning to the professional world, a subsidized student loan can be very helpful in the beginning. You can take up to 6 months to figure out your repayment strategy and job situation.

Cons of Subsidized Student Loans

Here are some of the problems with getting a subsidized student loan:

  • If your parents or legal guardian(s) make enough money (yearly) to be able to make payments on your loan after expenses, then you can’t demonstrate financial need, which makes you ineligible for a subsidized student loan.
  • Subsidized student loans are only available to undergraduate students and those studying for basic certifications. Graduate or professional students and secondary/mastery certifications cannot be subsidized by the government. However, individual organizations may sometimes make an exception as part of their employee benefits.
  • The annual subsidized loan limit is relatively low. It’s currently capped at $23,000 per year, which barely covers half of the yearly tuition fee of most colleges and universities.

It can be difficult to adjust to high tuition fees, especially when the annual loan limit is capped – especially for students going to private or Ivy League schools.

Features of Unsubsidized Student Loans

Unsubsidized student loans accrue interest over the duration of your studies, during deferment, and grace periods. While you are not obligated to pay interest during these periods, your refusal to pay will result in the interest amount being added to the principal amount, which increases the overall payable interest, as well.

is a breakdown of the features of unsubsidized loans:

  • A fixed interest rate of 2.75% for undergraduates and 4.30% for graduate students.
  • A loan origination fee of 1.069%.
  • You receive a six-month grace period after graduating, during which you don’t have to pay interest on your loan. However, it still accrues in your principal amount.
  • The interest is capitalized in the duration of your studies.
  • There is no requirement for proof of financial need. Practically anyone (dependents and students) can apply for an unsubsidized student loan.

Unsubsidized loans are best for graduate students and people who can’t demonstrate the financial need for a loan.

Things to Avoid If You’ve Taken Out a Subsidized Student Loan

If you have a subsidized student loan to pay off, you need to be careful with your financial and academic decisions. This is because certain terms and conditions may render your loan agreement null and void. That’s why it’s best to avoid doing the following:

  • Moving from a half-time to a quarter-time enrollment, since subsidized student loans are not offered to students enrolled under half-time.
  • Switching degrees (in the middle of your loan term) during the course of your studies. More specifically, switching to a shorter running degree, which can cause problems with your interest calculations.
  • If you want to switch schools, make sure you don’t switch from a loan participating school to one that isn’t part of the loan program or doesn’t support it. This will not only leave you with no financial backup but will add additional charges for breaking the loan agreement, on top of the loan amount.
  • Most importantly, avoid dropping out of school altogether. You may incur charges for breaking the loan agreement and the grace period will be nullified. The repayment methods will also become limited.

It’s best to see your studies through, especially when you have committed to them by taking out a loan.

Are Subsidized Student Loans Worth it?

With high fees and a requirement for degrees and certifications in the professional world, students now have little to no choice when it comes to paying for their education. Most people today can’t even partially afford the fees of colleges, which makes taking out a loan the only way to pay for higher education.

Subsidized student loans help students dedicate themselves to studying, instead of worrying about loan repayment. It helps students establish themselves professionally before they have to repay what they owe.

Overall, you should assess your financial and academic situation before deciding to apply for a subsidized loan.