These loans are offered by the U.S Department of Education and are meant for certain students who need financial assistance to study in college or further their professional career. However, the loans are associated with certain terms, conditions and differences.
What are subsidized student loans?
For Subsidized student loans, the government pays the interest on behalf of the borrower. The interest will be paid while the borrower is in school at least half time, six months after graduation and during a period of deferment. Subsidized loans are for undergraduate students with demonstrated financial need determined via the Free Application for Federal Student Aid (FAFSA). Subsidized loans have greater advantage as they reduce the total cost of borrowing since the government covers most of the interest allowing students to focus on their studies. Overall, the repayment amount for subsidized loans is lower, making it appealing for undergraduate students.
What are unsubsidized student loans?
Unsubsidized student loans are federal loans that accumulate interest once disbursed. It is for both undergraduate and graduate students and not given on the basis of financial need. Additionally, for subsidized loans, the borrower is expected to pay accruing loan interest whilst in school. Unsubsidized loans can become more expensive over time if the interest is not paid while in school.
Key differences between subsidized and unsubsidized loans:
Interest: For subsidized loans, the interest is covered or paid by the government. However, for unsubsidized loans, all the interest is paid by the borrower.
Need and Eligibility: From the assessment by the FAFSA, subsidized loans are awarded based on a student’s demonstrated financial need. In contrast, unsubsidized loans are available for all students irrespective of their financial condition.
Loan Limit: The total amount a student can borrow in each academic year varies and is usually determined by the college, what year you are in and if you are a dependent or independent student. Generally, subsidized loan limits are much lower than unsubsidized loan limits.
Impact on repayment:
Subsidized Loan: The total repayment of borrowers of subsidized loans is relatively smaller thus reducing their financial strain and monthly repayment.
Unsubsidized Loan: The interested accrued with this type of loan can significantly increase the total loan balance. Thus, it is advisable for borrowers to pay interest whilst still in school to avoid it from capitalizing resulting in an increase in the total cost of the loan.
Deciding the best loan type:
Before deciding on the best loan type – subsidized or unsubsidized loan, students must first evaluate their financial need to understand how each loan type can impact their long term financial goal. Subsidized loans offer significant benefits to borrowers as a result of government paid interest. Unsubsidized loans, however, offer large amounts of funding without financial need. Analyzing both options carefully whilst considering your long term financial situation can assist students in deciding a suitable loan type to support their education or professional career.
For more information on subsidized and unsubsidized loans, visit the official site of the Federal Student Aid here.
