By now, you’ve likely heard a lot about the changes to the Free Application for Federal Student Aid (FAFSA). Students in college (or enrolling in college) are strongly encouraged to fill out a FAFSA each school year, as the form determines eligibility for financial aid, such as grants and student loans. However, you may not have heard about the different types of loans that are made available through the FAFSA.
Two of the most popular types of loans you may be offered through the U.S. Department of Education are subsidized and unsubsidized loans. But which one do you want or qualify for? Here are some of the major differences between subsidized and unsubsidized loans that you should know about.
Direct subsidized loans have better terms for interest accrued
Perhaps the largest difference between subsidized and unsubsidized loans is how interest is accrued. There are noticeable financial benefits associated with subsidized loans. With a subsidized loan, the U.S. Department of Education pays interest on money borrowed while you’re enrolled at least half-time, for a grace period of six months after you leave school and for a deferment period. This means you start accruing interest six months after graduation rather than the day you take out the loan, making the difference between several thousand to tens of thousands of dollars. If you take out an unsubsidized loan, you will be responsible for all of the interest accrued, including while you were enrolled in school and during any period of deferment. Unpaid interest will be added to your principal loan balance. It is advisable to make interest payments while in school to decrease the amount you will owe after graduation, but this is not always possible for students who may only work part-time or who are unable to work while they are in school.
Loan limits vary between direct subsidized and unsubsidized loans
The amount of an unsubsidized loan is determined by the college or university you are attending and your grade level, but will never exceed the amount of your tuition. There are also more stringent limits on the amount of subsidized loans a student can take out. For example, a dependent undergraduate student can qualify for a maximum loan of $5,500 for his or her first year, but only $3,500 of that amount can be subsidized.
Students must also be aware of aggregate loan limits—$31,000 for a dependent undergraduate student, only $23,000 of which may be subsidized. For a particularly expensive school, this means a student may reach his or her aggregate loan limit before graduation.
You must demonstrate financial need in order to receive a direct subsidized loan
You will only be offered subsidized loans if your FAFSA demonstrates financial need. However, even if you do demonstrate financial need, you may also receive unsubsidized loans to help cover additional costs. On the other hand, you do not need to demonstrate financial need to qualify for an unsubsidized loan, so unsubsidized loans are available to everyone.
Direct subsidized loans are offered only to undergraduate students
Subsidized loans are only available to undergraduate students, or those seeking an associate degree or a bachelor’s degree. Unsubsidized loans, however, are offered to both undergraduate and graduate students seeking a master’s or doctoral degree.
Unsubsidized loans do not have a time limit for eligibility
Subsidized loans have a time limit, called a maximum eligibility period, on how long a student is eligible to receive this type of aid, while unsubsidized loans do not have a time limit. Subsidized loans can be awarded for up to 150 percent of your program length. For example, a typical bachelor’s degree may require 120 credits completed over four years. For such a student, a subsidized loan would be available for up to six years (150 percent of four years), or, around 180 credits. After this period, the student would need to rely on unsubsidized loans.
Both subsidized and unsubsidized loans offer some of the best interest rates and most flexible payback conditions to students, especially when compared to private loans. If you plan to take out loans to pay for your college education, be sure you fully understand all that is being offered to you to maximize your search for financial aid. Understanding the differences between subsidized and unsubsidized loans is crucial to this process. It is recommended to accept your subsidized loans first, and then accept unsubsidized loans as needed after that. Most importantly, if you have questions, don’t hesitate to ask your college or university’s financial aid office for help navigating your options.