Understanding the difference between subsidized and unsubsidized student loans can save you a bundle of debt.
Given how much they have in common, it’s understandable if you have trouble telling them apart (especially since they have other names too – we’ll explain in a moment).
Both loans are part of the federal government’s grant offering to help students meet college costs.
Although unsubsidized loans take up a larger proportion of the outstanding direct loans – $ 528.5 billion compared to $ 282.9 billion in subsidized loans as of first quarter of 2020 – There is a lot of overlap between borrowers taking out both types.
We explain the difference between the two loans and how each can affect your finances long after you’ve finished your final exams.
Subsidized or unsubsidized student loans
If you applied for financial assistance, you have likely seen references to Direct Loans, Stafford Loans, and Stafford Direct Loans. What is the difference?
The answer: nothing.
The federal student loans for undergraduate students are known as direct subsidized and direct unsubsidized loans (which are different from Loans for Parents or Graduates Plus, consolidated loans and the now defunct one Perkins loan).
Another name you might hear: Federal Family Education Loans (FFEL). This program ended in 2010 – all subsidized and unsubsidized student loans are now made under the direct loan program.
Congress renamed the direct student loan program in 1988 to honor US Senator Robert Stafford for his work in higher education; Now direct credits are also known as Stafford credits or Stafford direct credits.
So if you do research on student loans (or your Grant letter), notice:
- Direct Subsidized Loan = Subsidized Stafford Loan = Directly Subsidized Stafford Loan.
- Direct Unsubsidized Loan = Unsubsidized Stafford Loan = Direct Unsubsidized Stafford Loan.
Roger that? Well, now to the important differences (and similarities) between subsidized and unsubsidized loans.
Tale of the Tape: Subsidized vs. unsubsidized student loans
Comparing subsidized and unsubsidized loans side-by-side is probably the easiest way to see the differences. We’ll go into the details below:
|Who is eligible for a loan?||Students with financial needs.||Students and PhD students (no financial requirements).|
|How much can i borrow?||Limited by your financial needs, addiction status, and school year. If you hit the limit, you will qualify for unsubsidized loans.||Limited by the cost of attending your school, addiction status, and school year. When you hit the limit, you will need to find another source of money (such as private student loans).|
|Is there a time limit? (For first-time borrowers after July 1, 2013.)||The maximum funding period is 150% of the published duration of your program (example: for a four-year degree, the maximum funding period is six years).||No time limit.|
|Who pays the interest while I am at school, during the grace period and during the postponement periods?||The government.||You.|
Based on this table, subsidized loans are the winners (if you don’t know why, check this last line: Any option where someone else pays your bills is a winner). But let’s find out exactly why you should choose subsidized loans when given the option.
Why Subsidized Loans Are Better Than Unsubsidized Loans: You Save Money
If you have a subsidized loan, the federal government pays the interest on loans when you are at least halfway through school, during the six-month grace period after leaving school, and during school hours Deferrals.
If you have an unsubsidized loan, not only will the interest pile up every year at the college, but it will continue to accumulate during your grace period Interest is capitalized.
Confused? Let’s look at an (admittedly simplified) example:
Sara and John are applying for student loans for their junior and senior college years, respectively.
In both years, they will each receive $ 5,000 in loans with an interest rate of 3%.
But Sara qualifies for a subsidized loan while John receives an unsubsidized loan.
If you lose your Eligibility for Subsidized Student Loans but are still enrolled in your current program, you will be responsible for paying interest on any previously taken out Subsidized Loans.
On graduation day, Sara owes $ 10,000 (junior and senior loan) because the government paid the interest on her loan while she was studying. John owes $ 10,000 plus $ 450 in interest ($ 150 in interest on the loan he took out last year plus two years of interest – $ 300 – on the loan he took out last year).
If Sara and John use the grace period, Sara will accrue interest on the original $ 10,000 when she begins paying back her loan. John will receive interest on his new total of $ 10,600 when he begins repaying his loans (his original $ 10,000 plus $ 450 interest accrued by the closing date plus an additional $ 150 interest during the six month period Grace period).
Why Subsidized Loans Are Harder To Get
If you look at the example and think, “This is a no-brainer: subsidized loans all the way!” – Yes, consider this a difficult lesson in reality.
The only way you can get subsidized loans is for your college’s financial aid office to discover that you can’t afford to pay the cost of attending that school.
Although the formulas can get a little complicated – and vary by school – here’s a basic way to find out how much you can get in subsidized and unsubsidized loans:
- Participation costs (COA) – expected family contribution (EFC) = needs-based assistance (including scholarships, grants, work study programs and subsidized loans)
- Attendance Costs – Financial assistance you have already received (including needs-based assistance and merit-based grants) = unsubsidized loan
The grant office at your university will decide how much grant you can receive. So if you think there was a mistake or you want to appeal, this is the place to contact them.
How Much Money Can You Get?
When you start your freshman year of college, you don’t have as much loan money as you did when you were a junior or senior.
And if you are an independent student, you are entitled to more loans than if your parents are still taking you.
All of this means that there are many variables that will determine how much loan money you can get each year.
If you are a dependent student in your freshman year, the direct subsidized credit limit is $ 3,500 while the direct unsubsidized credit limit is $ 2,000.
If you are in college and own both subsidized and unsubsidized loans, try paying back unsubsidized loan interest first to avoid as much interest capitalization as possible when you graduate.
If you are an independent student in your third year or beyond, the direct subsidized credit limit is $ 5,500 and the direct unsubsidized credit limit is $ 2,000.
And if you are a PhD student or a professional student, the annual direct unsubsidized credit limit is $ 20,500 (remember, as a PhD student, you cannot receive subsidized credits).
The exact credit limits for your year can be found at Department of Education credit limit tables.
What do subsidized and unsubsidized loans have in common?
While the differences between subsidized and unsubsidized student loans make a huge difference financially, there are some similarities that the loans share, including the following.
The colleges you are applying to will use your FAFSA form to determine your eligibility.
To receive either type of direct loan, you must be at least halfway enrolled in school in a program that leads to a degree or certificate.
Interest rates (for students)
The federal government sets the interest rates on all student loans each year.
For direct student loans paid between July 1, 2020 and July 1, 2021, the student interest rate is 2.75%.
For PhD students, the interest rate on unsubsidized loans is 4.3%.
If a subsidized or unsubsidized loan is paid out, a loan fee will be deducted from the amount. The fee is calculated as a percentage based on when you took out your loan.
For loans disbursed on or after October 1, 2019 and before October 1, 2020, the loan fee is 1.059%. For example, if you took out a $ 3,000 loan, the fee is $ 31.77, so you will receive $ 2,968.23 in that term.
Regardless of whether it is subsidized or unsubsidized, your student loan money will be sent directly to the school to cover your tuition, room and board every semester, trimester, or quarter (depending on your school).
If there is any money left (or if you don’t live on campus) the school will send you a check for the remaining amount within 14 days. For textbooks and other study materials, the school must offer you the opportunity to access funds within seven days of the start of the semester.
If you can find your textbooks and teaching materials for less than the campus bookstore sells them, you can request the check for the remaining amount.
Your school must publish the International Standard Book Number (ISBN) for all required text in the online course schedule. Use this number when you want to buy cheaper prices.
If this is your first time getting a direct subsidized or unsubsidized student loan, there are additional restrictions to keep in mind:
- If you are a freshman and a first-time borrower, the school may wait up to 30 days to give you your loan money. If you need the money beforehand (e.g. for books), the school should have a policy in place of either a bookstore voucher or some other way to cover the expenses until you get your loan money.
- The federal government requires you to complete 30 minutes online Incoming advice before you can take a loan. Your school may need additional or alternative advice. Therefore, please contact the financial assistance office first.
Change your mind about a loan
If you find that you eventually don’t need your subsidized or unsubsidized credit, you can cancel all or part of your loan without incurring interest or fees within 120 days of receiving it.
And if you’ve declined money but have reconsidered it, contact your financial assistance office. Most colleges and universities will resume a federal student loan offering that was included in your original grant package.
Subsidized, unsubsidized … it doesn’t matter. The government wants their money back.
When you get direct loans, hear from yours Loan servicerWho will be your contact if you have any questions about your payments or the loan.
Tiffany Wendeln Connors is an associate and editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.
This article originally appeared on www.thepennyhoarder.com