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

By Lorena Roberts on April 30, 2018

It’s no joke that student loans are definitely on the incline. If I think about all the friends I’ve made since coming to college, I’d be willing to bet almost all of them have some amount of student loan debt. As my class graduates in the next few weeks, my classmates are hard-pressed to find jobs sooner rather than later. It’s best to start making payments on loans as soon as you can in order to avoid paying a ridiculous amount of interest.

But maybe student loans are new to you. Whether you’re just starting college or your family’s financial situation has changed, staying up to speed on what kind of loans are available is pretty important. You definitely shouldn’t take out a loan without knowing all of your options.

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Subsidized loans:

These are loans that become available to you through your Free Application for Federal Student Aid (FAFSA). The US Department of Education will pay for the interest you accumulate while you’re in school, but you must be enrolled in a university at least part-time to receive this benefit.

After you graduate with your degree, you’ll even have a six month grace period to find a job and start making payments on your loans. Throughout your schooling and those six months following graduation, any interest that builds up on your loans will be paid off. The principal amount will then be your responsibility, as well as any interest that accumulates moving forward.

The downsides to subsidized loans is that they’re only available to undergraduate students, and the recipient must demonstrate financial need in order to be eligible for this type of loan.

Once you fill out your FAFSA, where you’ll list the school you’ll be attending (or the list of schools where you’re applying), that university will determine the amount you which you can borrow, based on the need that you’ve demonstrated. You cannot borrow more than your financial need.

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Unsubsidized loans:

These are loans that are available to both undergraduate and graduate students. Interest starts accumulating the second you receive your first loan disbursement. You still aren’t required to pay this until you’re out of school, but you will not receive any help from the Federal government and you will not have a six month grace period. However, the amount of money you can borrow is much higher, as you do not have to demonstrate financial need.

Like with a subsidized loan, your school will determine the amount you are eligible to receive. This comes from analyzing both the cost of attendance and the other financial aid that you receive.

To receive either of these types of loans, you must be enrolled in school at least part-time, working towards a degree. The interest rates on both unsubsidized and subsidized loans for undergraduates is currently sitting right under 5% at 4.45%. However, unsubsidized loans for graduate students have a 6% interest rate.

In addition to interest rates, it’s important to note that both unsubsidized and subsidized loans include a loan fee. Just over 1% of your loan disbursements will be deducted to serve as the loan fee.

Understanding student loans can be tough, and it’s likely that you and your family will have many questions about the process. If you’re looking for more information, visit the federal government’s website on student aid.

Are those my only options?

No, of course not!

PLUS loans are available to parents of all students (undergraduate, graduate, professional) to help with the cost of education. When taking out a PLUS loan, the credit history of the borrower will be taken into consideration. There is not a limit on the amount that can be borrowed, and the student or parent does not have to display a need for financial aid. The interest rate on Parent PLUS loans are about 7%, which is pretty steep, but this money can be used for a variety of things, including room and board, books, supplies, and “personal expenses.”

You’ll probably want to be smart about taking out a PLUS loan. There are cases where parents take out much more than what is really needed to pay for their child’s education. Since there’s not a grace period, these loans are expected to be paid back in full (plus 7% interest).

If you’re worried about loan repayment…

Don’t be! There are plenty of options when it comes to paying back your loans. If you feel like you’re drowning under a mountain of debt, look into jobs that are hiring recent college grads and are willing to pay off your student loans for you! The Federal Government will often “forgive” student loans for those who come to work for them and are highly qualified.

It’s never the wrong answer to invest in yourself. Just be smart about it.

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