If you take out federal student loans to pay for college, they will fall into one of two broad categories: subsidized or unsubsidized. The major difference between the two is that Direct Subsidized Loans don’t charge borrowers interest during certain periods of deferment, like while you’re enrolled in school. Direct Unsubsidized Loans charge interest during all periods. Show
Subsidized vs. unsubsidized loansBoth Direct Subsidized and Direct Unsubsidized Loans are part of the federal Direct Loan Program. When you submit the Free Application for Federal Student Aid (FAFSA), your school sends you a financial aid award letter that explains what you qualify for and how much you can borrow. Here’s how subsidized and unsubsidized student loans work:
What is a subsidized loan?A Direct Subsidized Loan is a type of federal student loan that undergraduate students can receive by showing financial need. They’re less expensive than Direct Unsubsidized Loans because interest doesn’t accrue on them during certain time frames. The U.S. Department of Education pays interest on subsidized loans while the borrower is enrolled at least half time in school, during a six-month grace period after graduation and during other deferment periods. Your school decides how much you can borrow based on the cost of attendance, your demonstrated financial need, your year in school and any other financial aid you receive. You can borrow a maximum of $23,000 in Direct Subsidized Loans over the course of your education, though limits cap out at $5,500 a year. Graduate and professional students can’t borrow subsidized loans. The federal government sets federal student loan interest rates, and the rates may change each school year. For the 2021-22 academic year, undergraduate students have a 3.73 percent interest rate on Direct Subsidized Loans. For 2022-23, this will rise to 4.99 percent. What is an unsubsidized loan?A Direct Unsubsidized Loan is a type of federal student loan that starts accruing interest as soon as money is disbursed to your school. You may choose not to pay this interest while you’re in school and during your six-month grace period, but any unpaid interest that accumulates during this time will be added to your total balance. Dependent students can borrow a total of $31,000 in combined unsubsidized and subsidized loans, while independent undergraduate students can borrow up to $57,500 total. Graduate or professional students can borrow a total of $138,500 in Direct Unsubsidized Loans, including any undergraduate loans. Medical school students can borrow up to $224,000 in Direct Unsubsidized Loans. Direct Unsubsidized Loans for undergraduates have a 3.73 interest rate for the 2021-22 school year and a 4.99 percent interest rate for the 2022-23 school year. Direct Unsubsidized Loans for graduates have a 5.28 percent interest rate for 2021-22 and a 6.54 percent interest rate for 2022-23. Unlike with subsidized loans, you do not have to demonstrate financial need to qualify for unsubsidized loans — these loans are open to all borrowers who are able to receive federal aid. Which is better: Subsidized or unsubsidized loans?Subsidized loans are the best first choice for borrowers; since the federal government covers the interest that accrues on your loans, it’s less money for you to pay out of pocket. This is especially true for borrowers who are unable to make interest payments while they’re in school. However, some borrowers cannot demonstrate the financial need necessary to qualify for this type of loan, leaving unsubsidized loans as the only option. Unsubsidized loans are still worth considering — while interest will accrue immediately, these loans still have low interest rates and benefit from federal protections like the COVID-19 forbearance period. Should I take out federal or private student loans?As you consider how to pay for college, it’s wise to take advantage of any grant or scholarship opportunities available to you before you start to look at financing options. If you do have to borrow money, it’s almost always best to start with federal loans. These loans come with many benefits unique to the federal government, like income-driven repayment plans, long forbearance and deferment periods and loan forgiveness options. If grants, scholarships and federal loans don’t cover your costs, you may need to stack on private student loans to finance the remaining balance. Private student loans often have higher interest rates if you or your co-signer have average credit, and they don’t offer the same benefits as federal loans. With that said, private student loans can be a useful tool if you’ve hit the loan maximum on federal loans or if you have exceptional credit. How to apply for a federal student loanIf you’ve run the numbers and determined that you need to borrow money for college, the process of applying for a federal loan is fairly simple:
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Is subsidized better than unsubsidized?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 need.
Is it better to pay subsidized or unsubsidized loans first?If you have federal student loans, they may be either subsidized or unsubsidized loans. In this case, it's typically best to focus on your unsubsidized loans first, since they accrue interest during school and during your grace period.
What's the difference between subsidized and unsubsidized student loan?Subsidized Loans do not accrue interest while you are in school at least half-time or during deferment periods. Unsubsidized Loans are loans for both undergraduate and graduate students that are not based on financial need.
What is the best type of student loan to get?A subsidized loan is your best option. With these loans, the federal government pays the interest charges for you while you're in college.
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