Subsidized vs. Unsubsidized Student Loans

Subsidized vs. Unsubsidized Student Loans May 2, 2012

As educational costs continue to rise, many students find themselves borrowing money from student loans in order to come up with the cash they need to pay for expenses. These loans can be used to pay for college tuition, room and board, fees, books and other necessary items. When borrowing money for college, students have two different types of federal student loans that they can access: subsidized and unsubsidized. What are the differences between these two types of loans? Which type of loan is more attractive for students?

Subsidized and Unsubsidized Loans:

How to Qualify

subsidized vs unsubsidized loanIn order to qualify for federal student loans, students have to fill out a Free Application for Federal Student Aid or FAFSA. This document asks for specific financial information about the student and his parents. Once this application has been submitted, the government will be able to tell how severe the student’s financial need is. Students who have a significant financial need may be able to qualify for subsidized student loans. Those who do not have a financial need, as determined by the government, will not be able to qualify for subsidized loans. Instead, they can typically qualify for unsubsidized student loans.

Subsidized vs. Unsubsidized Loans

What’s the Difference?

When a student qualifies for a subsidized student loan, the interest rate will be a bit lower on these types of loans in most cases. For example, during the 2011-2012 school year, the interest rate for subsidized student loans was 3.4 percent while the rate for unsubsidized student loans was 6.8 percent. These rates change every year based on what the government decides to issue loans at.

In addition to getting a cheaper interest rate some years, those who qualify for subsidized student loans can also get help paying some of their interest. While students are in school, they do not have to start making payments on their student loans. They can choose to defer the interest until after they get out of college or they can choose to make interest payments only while attending class. Those with subsidized student loans can choose to have the government pay their interest charges for them while they are in school.

Students who receive unsubsidized loans do not have the option of getting their interest paid for them. Instead, they can avoid making payments while in school by deferring the interest and adding on to the principal balance of the loan. This can really add up quickly over time and result in a much higher student loan at the end of their college education.

Minimizing Interest on Unsubsidized Loans

Those who qualify for unsubsidized student loans may be tempted to defer interest payments while they are in school. The problem with this is that after interest has been added onto the principal balance, more interest is charged on that new amount during the next period. This turns into a debt snowball over time and causes the loan to grow fast.

Instead of deferring the interest payments, it is usually better to pay the interest as it accrues. This way, the interest charges will be minimized overall. This has the potential to save you quite a bit of money on student loan debt.

Loan Limits: Subsidized Vs Unsubsidized Loans

Another key difference between these two types of loans is the loan limit for each. Both subsidized and unsubsidized loans come with a particular loan limit. This means that students can only borrow up to a certain amount with each type of loan. For example, students in their first year of college can borrow up to $3,500 per year with a subsidized student loan. Students can borrow up to $2,000 per year as a dependent student or $6,000 as an independent student with unsubsidized loans. The loan limits on both types of loans increase as students get older. By the time they are seniors or fifth year students, they can borrow $5,500 with subsidized student loans or up to $7,000 with unsubsidized student loans. This means that students have to be aware of how much they are borrowing, and how much they can qualify for with each type of loan program.

One of the attractive things about these types of loans is that they can be combined to help pay for a student’s school. For example, if an individual qualifies for subsidized student loans, he can borrow the maximum amount of money allowed for the year. Then if he still needs to borrow more money for school, he can use money from unsubsidized student loans up to the legal limit as well. This makes it easier for those who need to borrow large sums of money with these loan programs.

Students who can qualify for subsidized student loans should take full advantage of them before venturing into unsubsidized loan territory. Both of them can provide financial assistance, but subsidized loans are obviously more attractive.

Were you helped with subsidized loans in college?  Any tips on paying the loans off?

If this helped explain the difference between subsidized and unsubsidized loans, hit the +1 button!


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