Subsidized vs. Unsubsidized Loans: What you need to know
If you are considering taking out student loans for college or graduate school, you will need to figure out which type of student loan to take out: subsidized or unsubsidized student loans. This is an extremely important decision that will affect how much money you wind up paying in student loans.
We’re here to help you understanding everything that you need to know about subsidized vs. unsubsidized student loans so you can save as much money as possible!
Jump ahead to:
- Subsidized Student Loans
- Unsubsidized Student Loans
- Subsidized vs. Unsubsidized Loans
- How to apply for Subsidized and Unsubsidized Student Loans
- What about private student loans?
Subsidized Student Loans
Subsidized student loans, also known as Stafford Student Loans or Direct Stafford Loans, are a type of student loan available through the federal government. These loans are only available to undergraduate students who have demonstrated financial need.
The big benefit of subsidized student loans is that the U.S. Department of Education pays the interest on your loans when you are in school at least half-time and for the first six months after you graduate from school. Students who put their loans in a state of deferment will also have their student loan interest by the government. Note that the interest refers to only the accumulated on the student loan and not the student loan principle.
Unsubsidized Student Loans
Unsubsidized student loans are also offered by the federal government. Unlike subsidized student loans, these loans accumulate interest when you are in school and do not include grace periods for the immediate months after college graduation.
Private student loans, unsubsidized Direct Student Loans, and Direct PLUS loans are all unsubsidized.
Difference Between Subsidized and Unsubsidized Loans
The big difference is that you will wind up paying more interest (and paying more money) for any unsubsidized student loans that you take out. This is one of the big reasons why students should exhaust their subsidized student loans before taking out unsubsidized student loans.
However, there are a few other differences between subsidized and unsubsidized student loans that you should know about:
- Subsidized student loans are only available to students who have demonstrated financial need.
- If you are a graduate student, you will only be able to take out unsubsidized student loans as subsidized loans are only available to undergraduate students.
How to apply for Subsidized and Unsubsidized Student Loans
To apply for any federal student loan, students will need to complete and submit the Free Application for Federal Student Aid or FAFSA. The FAFSA will also allow you to access other grants, such as the Pell Grant or Federal SEOG Grant and federal work study.
After you submit the FAFSA you will need to be accepted by the college’s admissions office. Once you are accepted, you will receive a financial aid award letter that outlines that types of aid that you can take advantage of.
What about private student loans?
Private student loans are made by private organizations such as banks and other financial institutions. Private student loans should be a last resort after you have exhausted other types of financial aid including grants, scholarships, federal student loans, and work study.
Whether these student loans are subsidized or unsubsidized will depend on the specific loan and lender. We always recommend that you carefully review all of the details before taking out a private student loan as their rates and terms are generally less favorable than that of loans from the federal government.
Bottom line for students
Federal student loans are the the most preferable student loans for most students to take out. However, not all federal student loans are the same. Subsidized student loans, which are available to undergraduate students with demonstrated financial need, are the best for students as the Department of Education will pay your interest while you are in school, when the loans are deferred, and 6 months after you graduate.
As a last resort, students can take out private student loans from banks and other financial firms. These private loans should only be considered after other financial aid options are exhausted.