The Difference Between Subsidized and Unsubsidized Loans

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There is a lot to know in the vast world that encompasses college student loans. Perkins, FFEL, public, private; all of these terms and more will become your friends (or enemies) as you begin accruing student loan debt balances.

One thing you should know is that there are subsidized loans and unsubsidized loans. Since interest is calculated differently on the two types of loans, not knowing the difference can cost you money.

Use these tips to your advantage so you can best utilize your money to pay for college. We’ll start by talking about subsidized loans.

What is a Direct Subsidized Loan?

A Direct Subsidized Loan is a loan with the following characteristics:

  • Available to undergraduate students with financial need
  • Your school determines the amount you can borrow (up to the maximum of your financial need)
  • The U.S. Department of Education pays the interest on a Direct Subsidized Loan

Note that the Department of Education only pays the interest on your Direct Subsidized Loan under certain circumstances.

First, you need to be in school at least half-time. Second, they do pay the interest during a six-month grace period after you leave school. This applies whether you graduate or whether you drop out.

Also, they will pay the interest during a qualified deferment period as well. Note that there is an exception to this rule. The exception applies depending on when you took out your loan.

The exception is as follows: If you obtained your loan (i.e. took your first disbursement) between July 1, 2012 and July 1, 2014, you are responsible for paying the interest during the grace period.

Those are the basics of the subsidized loan. And now for some basic information regarding unsubsidized loans.

Pros and Cons of Direct Subsidized Loans

When it comes to direct subsidized loans there are both positives and negatives to consider. Let’s start with the pros.

Pros of Direct Subsidized Loans

  • The government pays the interest on your loans while you are in school (as long as you’re enrolled at least half-time)
  • You won’t have any payments due on the loan until six months after you graduate (or discontinue school classes)
  • The government pays the interest on your loans during deferment and forbearance periods (in many cases)

Cons of Direct Subsidized Loans

  • The total aggregate loan limit for Direct Subsidized Loans is much lower
  • Graduate students can’t qualify for Direct Subsidized Loans
  • Only students who demonstrate financial need can qualify for Direct Subsidized Loans

What is a Direct Unsubsidized Loan?

Direct Unsubsidized Loans are loans with the following characteristics:

  • Available to graduate and undergraduate students with no requirement to demonstrate financial need
  • Your school determines the amount you can borrow (based on the cost of your schooling and taking into consideration other financial aid you may have received)
  • You are responsible for paying the interest on a Direct Unsubsidized Loan in all circumstances – even while you’re still a student
  • If you choose not to pay the interest during all periods, the accruing interest will be added to the principal balance on your loan

As you can see, there can potentially be a huge financial difference between the two types of loans. Furthermore, there are other differences between the two types of student loans. These differences lie mainly in the amount a person can borrow using the two different loan types.

The chart below shares the loan limits of the two types of loans for undergraduate students.

The Dependent Students qualify for the Direct Subsidized Loans. Note that Dependent Students may qualify for the Unsubsidized loans as well. The Independent Students qualify only for the Direct Unsubsidized Loans.

Direct Unsubsidized Loans carry much higher loan limits than Direct Subsidized Loans. Furthermore, the total aggregate loan limit for Dependent Students is only $31,000, including $23,000 maximum in subsidized loans.

For Independent Students the aggregate loan limit is $57,000, with the same $23,000 maximum in subsidized loans.

Graduate student loan limits are high. Graduate students can obtain up to $138,500 in total loans, with $65,500 maximum in subsidized loans. The subsidized loans would have had to come from their undergraduate years since graduate programs don’t qualify for subsidized loans.

As you can see, there are some important differences between the two loan types. Now let’s go over some of the pros and cons of each type of loan.

Pros and Cons of Direct Unsubsidized Loans

Likewise, there are both benefits and costs to keep in mind when thinking about going the unsubsidized loans route.

Pros of Direct Unsubsidized Loans

  • The total aggregate loan limit for Direct Unsubsidized Loans is much higher
  • Direct Subsidized Loans can be used for Graduate programs
  • There is no need to demonstrate a financial need in order to qualify for Direct Subsidized Loans

Cons of Direct Unsubsidized Loans

  • The government does not pay the interest on your loans – while in school or any other time
  • There is no grace period that allows you to not pay the interest on your loan

Both types of loans have their positive and negative aspects. But no matter which type of loan you choose, you can be certain of one thing. Student loan payments can put a damper on your lifestyle.

Summary

Whether you qualify or use Subsidized Loans or Unsubsidized Loans, there’s no doubt college is costly. By utilizing the information above, you can pay for college smarter – and more cost-effectively.

How are you paying – or did you pay – for college? What advice do you have for those seeking student loans? Share your thoughts in the comments below. We’d love to hear from you!

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