December 29, 2020August 24, 2022Paying for CollegeFeatured1434 Updated on December 29, 2020 Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners. OUR PROMISE TO YOU: Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!). Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less Note that the government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period and no loans to be held delinquent or in default. * * * Most students need to use federal student loans or private student loans to fund their college education. When you take out federal student loans to pay for school, you may be considering subsidized versus unsubsidized loans. Both loans are available to undergraduate students, but the key difference is that direct subsidized loans are awarded based on need — and do not accrue interest while the student is in school or when loans are deferred after graduation. Unsubsidized loans, on the other hand, immediately and continuously accrue interest, so you’ll face a larger balance than what you borrowed if you skip in-school payments. Understanding other differences between subsidized and unsubsidized loans is essential because it can change how your student loan interest works, the amount you pay and how you decide to tackle student loan repayment. To break this all down, let’s answer the following questions about subsidized vs. unsubsidized loans:
Subsidized vs. unsubsidized loans: What’s the difference?The government sets the interest rate on direct subsidized and unsubsidized loans, and there is no minimum credit score required to qualify and rates are fixed. However, the amount students can borrow is limited. Students must also complete the Free Application for Student Aid (FAFSA) to become eligible for these loans.  Student Loan Rates are Rising!Apply for a private student loan and lock in your rate before rates get any higher. GET MY RATES
As we pit subsidized vs. unsubsidized loans, here’s what you need to know about each.
What is a direct subsidized loan?The government pays interest on a subsidized loan while you’re enrolled in school at least half time. If you’ve already graduated and put your loans into deferment or forbearance, the government also covers interest on your subsidized loans. While students are not required to pay interest on a direct loan while in school, interest begins to accrue immediately. “Either someone needs to pay that interest, or that interest is added to the original (principal) amount of the loan,” Peter Bielagus, a financial author and speaker, told Student Loan Hero.
If a student takes a $10,000 direct subsidized loan as a freshman, four years later, the loan balance will still be $10,000 because the government pays your interest costs. Direct subsidized loans are designed for lower-income, undergraduate borrowers. According to the Department of Education, your school determines the amount of direct subsidized loans you’re eligible for, and the amount borrowed via a subsidized loan cannot exceed financial need.
What are direct unsubsidized loans?Direct unsubsidized loans are also federal loans, and students must complete the FAFSA to be eligible. However, eligibility for direct unsubsidized loans isn’t based on financial need, and students are responsible for interest on direct unsubsidized loans, even while you’re in school or while your loans are in deferment after graduation. If you don’t make interest payments, the unpaid interest is added to your loan balance, making repayment more costly. “With an unsubsidized loan, the student is responsible for making the interest payments the moment the loan is taken out,” said Bielagus. “If the student does not make the interest payments, then those payments are simply added onto the principal amount.” If you borrow a $2,000 direct unsubsidized loan at 2.75% as a freshman, for example, and elect not to make in-school payments, the debt would grow to $2,247, according to our student loan deferment calculator.
Subsidized vs. unsubsidized loans: What are the similarities?Though there’s a big difference between subsidized and unsubsidized loans, both of these types of federal loan options share several similarities including:
When you compare subsidized versus unsubsidized student loans, you do not need to worry about these important criteria differing from loan to loan. Subsidized vs. unsubsidized loans in repayment: Which should you prioritize?When prioritizing loan repayments, it’s a good idea to repay your direct unsubsidized loans first before paying back your direct subsidized loans. Because an unsubsidized loan continues accruing interest while in school, the balance of your unsubsidized loans will be larger unless you paid the interest while in school. Say you’re an independent student in your fourth and final year of school, and you’re considering borrowing the maximum: $5,500 in direct subsidized loans and $7,000 direct unsubsidized loans at 2.75%. According to our loan deferment calculator (try it out below), not repaying the unsubsidized loan until the conclusion of your grace period would grow your balance by $288. At that point, you’d have to pay interest on the total $7,288 while your direct subsidized loans would still be at $5,500 so you’d pay interest on a lower amount. Student Loan Deferment CalculatorTotalMonthlyBeforeAfterNot only could you save on interest by paying the loan with the higher balance first, but repaying your direct unsubsidized loans first means that if you go back to school or otherwise qualify for deferment or forbearance, you won’t have as much unsubsidized debt for interest to grow. It makes a big difference whether your interest starts accruing while you’re in school or you get a pass until you graduate. Keep this in mind when you choose your student loan repayment strategy and work toward becoming debt-free after college. In many cases, it makes sense to choose direct subsidized loans if you qualify. After all, with the government paying your interest while you’re in school, you can save quite a bit of money. If you’re still not sure which repayment option is best for you, answer a few questions, and we’ll help you find a solution. Andrew Pentis, Miranda Marquit and Paul Sisolak contributed to this report. Need a student loan?What is better subsidized or unsubsidized loans?When it comes to subsidized and unsubsidized loans, subsidized loans are the clear winner. If you can qualify for them, you'll pay less money in interest charges with a subsidized loan, and you'll save money over the life of your loan. But not everyone will qualify for a subsidized loan.
What is the key difference between subsidized and unsubsidized student loans?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.
Do you pay back subsidized loans?Once you graduate, drop below half-time enrollment, or leave school, your federal student loan goes into repayment. However, if you have a Direct Subsidized, Direct Unsubsidized, or Federal Family Education Loan, you have a six-month grace period before you are required to start making regular payments.
Do you have to pay back subsidized or unsubsidized loans?Federal student loans can be subsidized or unsubsidized. A student's eligibility for subsidized loans is based on financial need. Although both types of loans have to be paid back with interest, the government makes some of the interest payments on subsidized loans.
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The difference between subsidized and unsubsidized loans
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