Your Guide To Subsidized Vs. Unsubsidized Student Loans

You got into college. Congratulations on this exciting time of learning, exploration vcdc and preparation for your career! Now you just need to figure out how to pay for it. Tuition comes to mind first, but there’s also housing, meal plans and textbook costs to think about.

When considering how to pay for college, federal student loans are a popular option. If you’re comparing subsidized versus unsubsidized student loans to determine which is right for you, it’s important to know they have different borrowing requirements and repayment terms.

What’s A Subsidized Student Loan?

When we talk about both subsidized and unsubsidized student loans in this article, we’re referring to federal loans made directly through the Department of Education. Private student loans have different terms that you should make sure you understand before taking them out. Perkins Loans also have different repayment terms, and you should contact your school for specific information.

A subsidized student loan is one that doesn’t charge interest from the time you receive the loan funds until it’s time to start repaying them – generally 6 months after you’re no longer enrolled at least half-time in school.

Subsidized loans are cheaper because interest doesn’t accrue until repayment. On the other hand, only a certain amount of your federal loans can be subsidized each year, going from $3,500 for freshman to $5,500 in your junior year and beyond. No graduate or professional student loans can be subsidized. While the overall amount you can borrow is based on your income, dependent student status and expected family contribution, this amount is consistent.

No matter the type of loan, you’ll have anywhere between 10 – 30 years to repay depending on your qualifications and the loan type. The monthly payment may also vary based on whether you’re on an income-driven repayment plan.

What’s An Unsubsidized Student Loan?

Unsubsidized student loans start to accrue interest when you get your funds. This makes them more expensive than a subsidized loan in terms of interest paid. Other loan terms, including when repayment starts and how long you have to pay off your balance, are typically the same as subsidized loans.

Unsubsidized loans cover any gap not covered by subsidized loans and other sources. The total amount you can borrow is based upon what year you’re entering your program and whether you meet the government definition of a dependent student.

Although it changes from year to year, the total amount that may be borrowed between both subsidized and unsubsidized loans by dependent students over their time in college is $31,000. This has to do with family being expected to help defray the cost of college. The federal government offers special Parent PLUS loans.

The loan limit for independent students who don’t fall into the dependent student category is higher. They can borrow up to $57,500 for their undergraduate education. This limit is $138,500 when adding undergraduate and graduate or professional student education. You also qualify for the higher loan limit if your parents don’t qualify for Parent PLUS loans.

The Difference Between Subsidized And Unsubsidized Student Loans

The following table represents the similarities and differences when comparing subsidized vs. unsubsidized student loans.

How To Apply For Federal Student Loans

When applying for financial aid, there are several steps you should take. Here’s a breakdown.

1. Complete The FAFSA

To determine student eligibility for federal financial aid, including both loans and grants, the federal government requires that you file the Free Application for Federal Student Aid (FAFSA). The government will ask about the following information for yourself and your parents if you’re considered a dependent student, or for yourself and your spouse, if married:

• Social Security numbers
• Tax returns
• Child-support records
• Cash, savings and checking account balances
• Net worth for investments, businesses and farms

This information can be submitted to up to 20 schools so that they can evaluate you for financial aid.

2. Apply For Grants

Once you have submitted your FAFSA, schools will let you know what grants you may qualify for and any additional information they may need from you. If you’re offered a grant, make sure you do what you can to verify and stay eligible for these. It’s free money that you aren’t obligated to pay back, unlike a loan. Every school may offer their own grants.

3. Check Your Eligibility For Loans

You’ll have to make sure you’re eligible for any loans you take. For federal subsidized and unsubsidized loans, that means attending school at least half-time – at least 6 credit hours per term. You also need to maintain satisfactory academic progress. The definition of this last part is going to depend on the school.

4. Determine How Much To Borrow

Schools often have detailed breakdowns regarding cost of attendance, typically broken down by program and class. Several factors are going to impact this including whether you live in or out of state at a public university, whether you live on campus, under or upperclassman status, and your program.

When evaluating schools, be very mindful of cost. You can even do some loan calculations based on estimations of what you would have to borrow. This can help you plan for your future while keeping your debt manageable.

5. Complete Required Education

If you haven’t taken it in the past, you’ll be required to take borrower education prior to accepting any loans. This is intended to give you an idea of what your responsibilities under the loan are and what you can do to effectively manage your payments and the loans you’re taking on. The federal government offers a course and your school may have its own requirements.

FAQs: Subsidized Vs. Unsubsidized Loans

Now that all the basics have been covered, let’s touch on a few other questions you may have.

Are subsidized or unsubsidized student loans better?

If you have the option for subsidized and unsubsidized student loans, you should take the subsidized ones first because the interest doesn’t build up until the repayment period starts. Unsubsidized loans start accruing interest immediately. However, if you need a big financial aid package, it may be a mix of subsidized and unsubsidized loans.

When do I have to pay back subsidized student loans?

Both subsidized and unsubsidized student loans remain in deferment for as long as you’re in school. Then there’s a 6-month grace period after you leave school. The repayment for both forms of loan starts after this grace period.

Do subsidized or unsubsidized student loans have a higher loan limit?

Unsubsidized loans have a higher limit than subsidized. Over your college career, you can borrow up to $23,000 in subsidized loans and up to $57,500 in unsubsidized loans as an undergraduate, for example.

Is it better to take out federal or private student loans?

The advantage of private student loans could be different rates and the ability to borrow more if you ran up against the limit for federal student loans. However, federal loans may be easier to consolidate and there are circumstances in which your loans may be forgiven if you’ve been paying on them long enough.

The Bottom Line

Subsidized loans don’t begin to build interest until repayment starts. In contrast, unsubsidized loans from the federal government accrue interest from the moment the funds are made available to your school. When evaluating your options, it’s a good idea to take subsidized loans first and then move forward with unsubsidized loans if you need access to further funds.

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