When it comes to getting a student loan, there are a lot of options out there for you to consider. First, you may look into both federal and private student loans. Federal loans are typically the way that most borrowers go with their first few student loans, but private loans are becoming more and more popular as the interest rate market becomes more competitive.
If you do opt to go with federal student loans, then you may notice that there are both a subsidized loan and a unsubsidized loan. First time borrowers may not really know what this means. Let’s take a closer look at subsidized and unsubsidized federal student loans and see what may be the best option for you.
What is a Federal Direct Subsidized Loan?
First, we will look at federal Direct subsidized loans. A subsidized loan is essentially a loan that is granted to you by the federal government that you do not have to pay interest towards while you are still in college, or during which times the loan is considered to be in deferment. For this type of loan, the federal government actually pays the monthly interest on the loan for you while you are in school or in a deferment period. This can save borrowers quite a bit of money over the life of the loan. These subsidized loans are obviously preferred because the government subsidizes the interest obligations on the student debt during school; they are often awarded on a financial need basis, taking into account expected family contribution.
What is a Federal Direct Unsubsidized Loan?
Next, we will look at what a federal direct unsubsidized loan is. These federal loan options do not offer the borrower any sort of assistance with interest payments. The interest on these unsubsidized loans starts to compound from the time the loan is taken out, and it will continue to accrue throughout school and the deferment period. This type of loan is typically awarded to borrowers who are deemed less financially needy, or in other words, these borrowers are perceived to have a great expected family contribution. This means that borrowers will pay the full amount of the loan back, including all interest that has been accrued over the life of the loan.
Subsidized vs. Unsubsidized Loans
The main difference between subsidized vs. unsubsidized loans is the way that interest is accrued. With that being said, there are some other unique factors that make these types of loans different. For example, subsidized loans are generally only available for students with a financial need, and they are never available for graduate students. That means that graduates are responsible for footing the interest on their student debt bill if they want to further their education beyond a four-year bachelor’s degree. There are also limitations to annual funding in subsidized loans per borrower. For instance, the amount caps out at $3,500 to $5,500 each year with a lifetime cap out at around $23,000.
Unsubsidized loans are a bit different. While they do cap out, the caps are a bit higher than they are with subsidized loans. For instance, the limit caps out is $31,000. It is also important to understand that while the interest will start to add up on these unsubsidized loans, you still will not have to pay on the loans until you finish school. This can mean that you pay much more in interest over the life of the loan, so you may want to be careful with how much you take out in unsubsidized student loans each year.
While there are differences in both subsidized and unsubsidized loans, there are also a few similarities. As with all federal student loans, your particular school will dictate how much you are able to borrow each year. So, regardless of how much the cap is, if your school doesn’t think you need the full amount for the year, you won’t get it. This is true with both types of federal student loans. They also share the same interest rates and loan fees.
So, which type of federal student loan is going to work best for you? Clearly, it makes more sense to try to get a subsidized federal loan first since the government will help by paying back some of the interest on the loan while you are still enrolled in school. To apply for a subsidized loan, you simply fill out the FAFSA application; if you are eligible and approved, then you’ll receive the loan. The problem is that not everyone is going to be approved for this type of loan.
At any rate, knowing the differences between and the expected obligations for both subsidized and unsubsidized student loans is important when starting college. While both are part of the federal direct loan program, they require different financial obligations during school, and knowing this difference is important when handling your personal finances.