Whats the difference between subsidized loans and unsubsidized loans

Types of student loans

Subsidized and Unsubsidized loans refer to Federal Direct Stafford Loans. There are two broad types of student loans:

• Private student loan – Loans by a lender such as a bank, credit union, state agency, or a school.
• Federal student loan – Funded by federal government. Free Application for Federal Student Aid (FAFSA) should be completed to avail or to check eligibility.
  • Federal Perkins loan - low-interest federal student loans for undergraduate and graduate students with exceptional financial need
  • Federal Direct Stafford Loans
    • Direct subsidized loan – low-interest federal student loans for undergraduate students with financial need
    • Direct unsubsidized loan – low-interest federal student loans for undergraduate and graduate students
    • Direct PLUS loans - federal loans for graduate or professional degree students and parents of dependent undergraduate students

Subsidized Loans

A subsidized Federal Direct Stafford Loan is based on financial need. It is only available to undergraduate students. The advantage of a subsidized loan is that federal government -- not the student -- pays the interest for the student during the following periods:

• While the student is enrolled in school at least half time
• During the six-month grace period after the student graduates, leaves school or drops below half-time enrollment
• During a period of deferment (a period when payments of principal are temporarily postponed)

Unsubsidized Loans

An unsubsidized loan is available to all eligible students, whether graduate or undergraduate. There is no requirement to demonstrate financial need. The student is responsible to paying the interest on the loan throughout the life of the loan. However, if the student does not wish to service the loan while in school, the accrued interest is capitalized i.e. added to the outstanding principal.

Eligibility

Eligibility criteria for Federal Direct Stafford Loans, whether subsidized or unsubsidized, include:

• U.S. citizens or eligible noncitizens
• Enrolled or accepted for enrollment on at least a half-time basis in an eligible program at an eligible school
• Registered with the U.S. Selective Service System (for males not exempt from registration)

In addition, qualification for subsidized loans requires the student to demonstrate ongoing financial need. Financial need is the difference between Cost of Attendance (COA) of a school and the Expected Family Contribution (EFC). After July 1, 2012, unsubsidized loans are no longer available to graduate students; they are for undergraduate students only.

Loan Terms

As explained in the overview, subsidized loans offer the advantage that the government pays the interest while the student is in school.

Each loan also has a grace period of six months. This is a period of time after borrowers graduate, leave school, or drop below half-time enrollment where they are not required to make payments on their federal student loans. Interest will accrue on subsidized loans made between July 1, 2012 and July 1, 2014, and all unsubsidized loans during grace periods. If the interest is not paid, it will be added to the principal balance of the loan when the repayment period begins.

In addition, Federal Direct loans also include a provision for deferment. Deferment is a postponement of payment on a loan that is allowed under certain conditions and during which interest does not accrue for subsidized loans. Unsubsidized loans that are deferred will continue to accrue interest and any accrued unpaid interest will be added to the principal balance (capitalized) of the loan at the end of the deferment period.

Interest Rate

The interest rates for the loans first disbursed between July 1, 2012 and July 30, 2013 are as follows:

Amount You Can Borrow

In both unsubsidized and subsidized loans, the amount depends upon the Cost of Attendance. For subsidized loans, the student can only borrow up to an amount equal to the difference between the cost of attendance (COA) and the expected family contribution (EFC).

This chart, from US Dept. of Education shows the maximum annual and total loan limits for subsidized and unsubsidized Stafford loans as of July 1, 2012.

Fees

The loan fees for federal student loans are:

• 1% for Direct Subsidized Loans and Direct Unsubsidized Loans
• 4% for Direct PLUS Loans

Perkins Loans do not have fees. Loan fees are deducted proportionately from each disbursement. This results in the actual amount received being less than the actual borrowed amount. The actual amount borrowed has to be repaid.

How to Apply

To apply for a Direct Loan, you must first complete and submit the Free Application for Federal Student Aid (FAFSASM). Your school will use the information from your FAFSA to determine how much student aid you are eligible to receive. Direct Loans are generally included as part of your financial aid package.

References

• U.S. Department of Education
• Federal Student Loans in the U.S.
• Federal Direct Stafford/Ford Loan / Federal Direct Unsubsidized Stafford/Ford Loan Master Promissory Note (MPN), the form a student must sign to obtain a Federal Direct Stafford Loan (whether subsidized or not).
• TGSLC - Federal Direct Loan Program (FDLP)

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