iBest Student Loans

Subsidized vs. Unsubsidized Loans

If a student is looking to finance their college education they will typically be offered two main kinds of student loans, subsidized and unsubsidized. It must be said that these two loans are fairly similar to each other, although there are some fairly obvious differences between them. A student should differentiate between the two prior to deciding which type of loan is best to their personal situation.

A subsidized student loan will not require the student to pay any interest that whilst they are enrolled in school. During this particular period of time, the federal government will actually pay the interest on the loan. However, as soon as the student graduates the grace period offered on these loans will end, and therefore they will need to start repaying their loan and interest. Subsidized loans are typically based on a financial need, and therefore the subsidized Stafford loan and Perkins loans are both classified as subsidized loans.

And unsubsidized student loan is where a student will need to pay back the interest on the loan while they are still in school. With that said, an unsubsidized student loan will still defer payment on the principle until six months after graduation, but the student should be aware that neither the school or the government will be picking up the tab on the interest, and unfortunately this is all down to them.

One of the major differences between these two types of loan is the amount a student is able to borrow per year. Subsidized loans have an extremely tight cap on how much can be borrowed per year and this will very much depend on a student specific situation and their financial need. It is also true that and unsubsidized loan will have a cap on them, although this is generally far higher than is offered with a subsidized loan. Therefore, once a student has reached the cap on borrowing money through a subsidized loan the only option that has left them is an unsubsidized loan, and therefore most students typically end up with a combination of both.

In order to qualify for a subsidized loan, the student’s financial need will first need to be calculated based on their expected family contribution (EFC), the academic level and finally the anticipated cost of their overall education. This overall cost should also include tuition, room and board, and books.

Stafford loans are the first type of loan that a student should seek after they have claimed any grants and scholarships may be available to them. Once again, a Stafford loan may be offered as either subsidized or unsubsidized, whereby a subsidized loan will see the interest paid by the government while the student is still in education. A student will need to begin paying off their Stafford loan six months after they graduate, or if their enrolment drops to below half-time. They will have up to 10 years to repay their subsidized student loan.

Even though an unsubsidized student loan will begin charging interest from the moment the money is disbursed to a student, many lenders offer borrowers the option to make interest only payments while they are still attending school. Just as with a subsidized loan, borrowers will have up to 10 years to repay their unsubsidized student loan.

In order to be eligible for either a subsidized or unsubsidized Stafford loan a student must be enrolled as a full or half-time undergraduate, graduate or professional student. They will need to be US citizen or eligible resident non-citizen, they will need to meet the financial need criteria as defined by the federal government, and finally they will need to sign an application and a promissory note.

It is also important to note that far more money is available for an independent student than a dependent student if they are looking to obtain an unsubsidized student loan. A prime example of this is that for the current educational year a freshman, sophomore, junior, senior and 5th year dependent student is eligible for $2000 as part of an unsubsidized loan, whereas an independent student is eligible for $6000 as a freshman or sophomore and $7000 as a junior, senior or 5th year student.

If a student is looking for a subsidized loan, their school will need to review the results of their Free Application for Federal Student Aid (FAFSA) in order to determine the actual amount that they can borrow. However, a student will not be required to demonstrate a financial need in order to receive an unsubsidized loan, although the school will still determine the actual amount of money the student can borrow.

Related Information