The most significant difference between subsidized and unsubsidized loans is that the government pays the interest rate on subsidized loans while in school. But with unsubsidized loans, you are liable for the interest rates while you are still in school.
Most students apply for federal student loans to cover the cost of starting and finishing college. The federal loans students receive are either subsidized or unsubsidized. Knowing which one is best in your financial situation is crucial.
So in this free resource, we will discuss the significant differences between subsidized vs. unsubsidized loans. By the end of this resource, you will be able to make an informed decision on which one you should consider.
Before diving into the comparison, I would like to take a moment to share with you the definitions of these federal student loans.
Subsidized Loans: These loans are for undergraduate students who demonstrate financial needs. Subsidized student loans have an amount limit you can borrow per year. You are only liable to start paying the interest rates after you graduate or leave school. The federal government takes care of paying the interest while you are still in school.
Unsubsidized Loans: These are loans for undergraduate and graduate students. You don’t need to demonstrate any financial needs or hardship to get these loans. In contrast to subsidized loans, the federal government does not pay the interest while in school.
Differences between Subsidized and Unsubsidized Student Loans
Now let’s get to the comparison in detail. We will be using the following metrics to point out the differences between subsidized vs. unsubsidized loans. These metrics are;
- Who qualifies.
- How much can you borrow?
- What are the costs?
- Grace Period.
Subsidized loans are for undergraduates who must demonstrate financial needs. Financial need is the difference between the cost of attending college and the ability to pay. So to get subsidized student loans, you have to prove that you and your family are unable to cover your college attendance cost.
On the other hand, Unsubsidized loans are available for undergraduates, graduates, or professional degree students. To qualify for these loans, you don’t need to demonstrate any financial needs.
How much can you borrow?
Subsidized student loans have a borrowing limit of $31000 for dependent undergrads, of which $23000 is subsidized. For independent undergrads, the limit is $57500, of which $23000 is subsidized. You can only borrow no more than $5500 in your first year as a dependent undergrad, of which $3500 is subsidized. In comparison, that amount for independent undergrads is $9500, of which $3500 is subsidized.
Unsubsidized student loans have an annual borrowing limit of $20500. The most amount you can borrow for your entire college or degree program is $138500.
What are the costs
Although subsidized and unsubsidized student loans have an origination fee of 1.057%, subsidized loans are still way cheaper than unsubsidized loans. Since the government pays for the interest rates of subsidized loans while you are still in school, they become way less expensive than unsubsidized loans.
The interest rate for subsidized loans have a fixed rate of 3.73% while that of unsubsidized loans range between 3.73% to 5.28%. The 3.73% interest rate is for undergraduates, while the 5.28% is for graduates and professional students.
The Grace Period
With subsidized student loans, you don’t have to make payments for at least six months after leaving school. During this time, the federal government will continue to pay the interest until the grace period ends.
On the other hand, the interest rate of unsubsidized loans continues to pile up during the grace period. Although you still have six months grace period, you are still responsible for the interest that accrues during this period.
The Deferment Period
Deferment is when you reduce or stop making payments on your student loans for a specific time frame. If you are facing financial hardship, you can apply for a federal student loan deferment.
Federal student loans have a deferment period of up to 3 years. If you have subsidized student loans, the federal government will take charge of the interest rate during your deferment period. It means the interest does not build up during the deferment period since the government pays for it.
As for unsubsidized student loans, the interest will pile up during the deferment period. This piled-up interest will be added to the amount due at the end of the deferment period.
Similarities Between Subsidized and Unsubsidized Loans
Despite the differences between subsidized and unsubsidized student loans, they share some similarities. These similarities include repayment plans, early repayment, interest rate, origination fees, and completion of entrance counseling.
There are eight repayment plans available to both Subsidized and Unsubsidized loans. These plans are;
- Standard Repayment Plans
- Graduated Repayment Plan
- Extended Repayment Plan
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan.
Both Subsidized and Unsubsidized federal student loans have no prepayment penalty fees. If you have the means to pay your loan in full before the last due date, you won’t incur any prepayment charges.
Interest Rate and Origination Fee:
The interest rate is the same only for undergraduate borrowers. There is a 3.73% fixed rate on both subsidized and unsubsidized federal student loans for undergraduates only.
The origination fee for both loans is set at 1.057%.
Completion of Entrance Counseling:
An entrance counseling makes sure you understand the terms and conditions associated with your loan. It also ensures you know your rights and responsibilities. In this counseling session, you will also learn how interests work, the different repayment options, and ways to avoid delinquency and default.
To take either subsidized or unsubsidized, you must go through this counseling.
How to Apply For Subsidized and Unsubsidized Student Loans
To apply for either subsidized or unsubsidized loans, you need to complete the FAFSA (Free Application for Federal Student Aid) at the official StudentAid website. Before filling out the form and submitting it, you have to make sure you meet the following criteria;
- You must either be a US citizen or have a national or permanent residence permit.
- You must be enrolled at least half-time in an accredited college.
- Must maintain satisfactory academic progress defined by your college.
- You must not have defaulted previous student aid program.
When you submit the Free Federal Student Aid Application (FAFSA), you will automatically be considered for direct subsidized and unsubsidized student loans. The loans will be added to your LionPATH Student Aid summary at the start of the academic year (February for first-year students and July for returnees).
First-time borrowers must also complete the admission counseling, and a master promissory note on studentaid.gov fill in. In most cases, you only need to complete these tasks once during your college career.
Your subsidized/non-subsidized loans will appear as a credit on your tuition fee statement after you meet these requirements.
Complete your need for loan counseling by signing up with studentaid.gov register and open “Complete consultation.”
Sign an MPN* by signing up to studentaid.gov, sign up, and select the MPN for direct loans that you want to preview or fill out.
*If you have technical difficulties signing the MPN, don’t hesitate to contact the US Department of Education Student Loan Support Center at 800-557-7394.
Subsidized student loans are way cheaper than unsubsidized loans. You should always check to see if you are eligible for a subsidized student loan. Even if you doubt your ability to properly demonstrate financial needs, don’t hesitate to apply for this loan first before considering other options.
If you don’t qualify for subsidized student loans, you should apply for unsubsidized loans before exploring other options. The other option is to apply for a private student loan. But private student loans should be your last resort.
You can check out this free resource on private student vs. federal student loans if you want to know the differences.