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Student Loans

What’s the Difference Between Subsidized and Unsubsidized Student Loans?

You're filling out college applications and dreaming big dreams about your future. But where will you or your parents get $140,000-plus to pay for them? (That's the average total tuition and fees for four years at a private college, according to U.S. News & World Report). Federal student loans could be the answer. There are two kinds of federal student loans—subsidized and unsubsidized. Understanding the difference between them is key to deciding which loan will best help you reach your college goals.

One of the biggest differences: The federal government pays the interest on subsidized student loans while you're enrolled in school, but with an unsubsidized loan, you have to start paying back the interest immediately. There are also some important differences regarding who is eligible, how much money you can borrow and more. Keep reading to learn more about subsidized vs. unsubsidized student loans.

Unsubsidized vs. Subsidized Loans: What's the Difference?

The key differences between subsidized and unsubsidized student loans include:

Interest Rates and Payments

Interest rates on both types of student loans are set by the U.S. government and are fixed for the life of the loan. With subsidized student loans, the government pays the interest accrued on your loan as long as you are in school at least half-time (based on your school's definition). That means your loan balance stays the same while you're in school: If you borrow $10,000 at the beginning of the year, at the end of the year you still owe $10,000.

With unsubsidized loans, you are responsible for paying the interest on the loan right away—even while you're enrolled in school, even during any loan deferment period, and even during the six-month grace period after graduation before you have to start repaying the balance of the loan.

What if you can't pay the accrued interest at that time? It may be hard to do on a student budget. If you don't pay the accrued interest, it gets added to the principal (a process called capitalization). Unfortunately, that means by the time your loan grace period is over after graduation, your loan balance could be significantly larger than the amount you originally borrowed.

Amount You Can Borrow

The U.S. Department of Education limits the dollar amount of subsidized and unsubsidized loans you can get each academic year (annual loan limits). They also limit the total amount you can borrow over your graduate or undergraduate career (aggregate loan limits). The limits vary based on your class status—that is, whether you're a freshman, junior and so on—whether your parents claim you as a dependent on their tax return, and whether or not your parents are eligible for a direct PLUS loan.

Currently, dependent students whose parents aren't eligible for direct PLUS loans are limited to borrowing an aggregate of $31,000 in subsidized and unsubsidized student loans over four years of college; only $23,000 of that amount can be in subsidized loans. Check out the U.S. Department of Education website to get the complete details on annual and aggregate loan limits and see what you may be qualified to borrow.

Qualifications for Borrowers

Applying for both subsidized and unsubsidized loans is easy—all you have to do is fill out the Free Application for Federal Student Aid (FAFSA). Based on your application, your school will tell you what type and amount of loans you qualify for. Often, it's a combination of different types of loans.

  • Financial need qualifications: Subsidized student loans are offered based on financial need. Unsubsidized loans don't require you to prove financial need. Often, unsubsidized loans are offered to supplement subsidized loans. If your family income is too high to qualify you for need-based loans or financial assistance, an unsubsidized loan can be a good option.
  • Degree program qualifications: Subsidized loans are available to undergraduates only. Unsubsidized loans are available for undergraduate, graduate and professional school students.

Repayment

Once you start making your student loan repayments, you might be lucky enough to have some extra money you can put toward your loan payments. If so, which loans should you prioritize? In general, it's best to repay the loan with the highest interest rate first. However, if you have an unsubsidized student loan and you weren't able to pay the interest during school, it's a good idea to put any extra money toward that loan first. Why? Remember, any unpaid interest that accrued during your school years gets added to your loan principal, so you're now paying interest on the original principal plus all the accrued interest. Ouch!

Unsubsidized and Subsidized: How Are They the Same?

There are also a couple of similarities between subsidized and unsubsidized student loans.

Eligibility

You're eligible to take out both types of loans for up to 150% of the time you're enrolled in college. For the typical four-year undergraduate degree, that means you can take out six years' worth of loans (4 x 150%). If you're getting a two-year master's degree, you could take out three years' worth of loans.

Interest Rates

Interest rates are the same for both subsidized and unsubsidized undergraduate loans. For the 2018-2019 school year, the interest rate on student loans is 5.05% for undergraduates. (For graduate and professional students, the rate for unsubsidized student loans is 6.6%.)

What Credit Score Do I Need for an Unsubsidized or Subsidized Loan?

Here's the good news: There's no credit check or credit score requirement for either type of loan. All you have to do is fill out the FAFSA form each year, and your school will notify you what types and amount of student loans you're eligible for.

The Takeaway

Many students need to borrow money to cover the cost of college. If you qualify for federally subsidized student loans, they can offer significant benefits compared with unsubsidized loans. However, both types of loans can be useful tools in paying for your college education. The key is to understand the commitment you're making when you take out a student loan and take steps to manage this and other debt wisely so you don't get in over your head.


Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.

This article was originally published on May 11, 2019, and has been updated.

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