Subsidized or Unsubsidized Student Loans 2021 Updates

Subsidized and unsubsidized loans are federal student loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. In this article, we’ll explain what a subsidized and unsubsidized student loans mean and their difference.

Subsidized or Unsubsidized Student Loans 2021 Updates

In this article:

When choosing a federal student loan to pay for college, the type of loan you take out either subsidized or unsubsidized will affect how much you owe after graduation.

If you’re eligible, you’ll save more money in interest with subsidized loans.

SubsidizedUnsubsidized
What you need to qualifyMust demonstrate financial needDon’t have to demonstrate financial need
How much you can borrowLower loan limits compared with unsubsidized loansHigher loan limits compared with subsidized loans
How interest works while you’re enrolled in collegeEducation Department pays interestInterest accrues
Who can borrowUndergraduate students onlyUndergraduate and graduate or professional degree students

If you meet the financial need requirements to qualify for subsidized loans, you’ll pay less over time.

That’s because while your subsidized loan for undergraduate study will carry the same interest rate as an unsubsidized loan, interest won’t accrue while you’re still in college and during other periods of nonpayment.

For this reason, it’s best to exhaust any subsidized loans you’re offered before taking out unsubsidized loans.

Read Also:

How Interest Accrues on Unsubsidized and Subsidized Loans

How Interest Accrues on Unsubsidized and Subsidized Loans

While in school

  • Subsidized: Interest is paid by the Education Department while you’re enrolled at least half time in college.
  • Unsubsidized: Interest begins accruing as soon as the loan is disbursed, including while students are enrolled in school.

Grace Time

  • Subsidized: No payments are due in the first six months after you leave school. The Education Department will continue to pay interest during this time.
  • Unsubsidized: Loan payments are not due in the first six months after you leave school, but interest will continue to build. It will then capitalize, meaning it’s added to the original amount borrowed. That increases the total amount you have to repay, and you’ll pay more in interest over time.

During deferment

  • Subsidized: Interest is paid by the Education Department during deferment, which lets you temporarily pause payments.
  • Unsubsidized: Interest continues to collect during deferment and will be added to your principal loan amount.

What’s The Difference Between Direct Subsidized Loans and Direct Unsubsidized Loans?

In short, Direct Subsidized Loans have slightly better terms to help out students with financial needs.

Here’s a quick overview of Direct Subsidized Loans:

  • Direct Subsidized Loans are available to undergraduate students with financial need.
  • Your school determines the amount you can borrow, and the amount may not exceed your financial need.
  • The U.S. Department of Education pays the interest on a Direct Subsidized Loan
    1. while you’re in school at least half-time,
    2. for the first six months after you leave school (referred to as a grace period*), and
    3. during a period of deferment (a postponement of loan payments).

*Note: If you received a Direct Subsidized Loan that was first disbursed between July 1, 2012, and July 1, 2014, you will be responsible for paying any interest that accrues during your grace period.

If you choose not to pay the interest that accrues during your grace period, the interest will be added to your principal balance.

Here’s a quick overview of Direct Unsubsidized Loans:

  • Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need.
  • Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.
  • You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
  • If you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, your interest will accrue (accumulate) and be capitalized (that is, your interest will be added to the principal amount of your loan).

Read Also:

How To Get Subsidized and Subsidized Loans

To get a federal loan, first, submit the FAFSA. You’ll get a report detailing how much federal aid you’re entitled to. Be sure to first take all the grants and scholarships you’re offered in the report since it’s free money.

You’ll also want to accept any work-study you’re offered before you take on loans. Each year you’re enrolled, your school will determine the amount you can borrow as well as the loan types you qualify for: subsidized or unsubsidized.

Taking on too much student loan debt may make repayment difficult after you graduate. It’s best to borrow no more than you expect to earn in your first year out of college.

How Much Can I Borrow?

Your school determines the loan type(s) if any, and the actual loan amount you are eligible to receive each academic year.

However, there are limits on the amount in subsidized and unsubsidized loans that you may be eligible to receive each academic year (annual loan limits) and the total amounts that you may borrow for undergraduate and graduate study (aggregate loan limits).

The actual loan amount you are eligible to receive each academic year may be less than the annual loan limit. These limits vary depending on

  • what year you are in school and
  • Whether you are a dependent or independent student.

If you are a dependent student whose parents are ineligible for a Direct PLUS Loan, you may be able to receive additional Direct Unsubsidized Loan funds.

Taking out Federal Loans vs. Private Loans

Taking out Federal Loans vs. Private Loans

Borrow federal loans first: Private student loans often carry higher interest rates and require a co-signer if a student borrower has no credit history.

Both unsubsidized and subsidized federal loans also offer more borrower repayment plans and forgiveness options than private loans.

Consider private loans only if you still need to fill a payment gap to meet college costs. Compare all private loan options, including their interest rates as well as repayment and forbearance options, before you borrow.

We hope you learned something from this article? Please keep in mind that your school determines the loan type, if any, and the actual loan amount you are eligible to receive each academic year.

However, there are limits on the amount in subsidized and unsubsidized loans that you may be eligible to receive each academic year (annual loan limits) and the total amounts that you may borrow for undergraduate and graduate study (aggregate loan limits).

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