What Is the Difference between Subsidized and Unsubsidized Student Loans?

Subsidized and unsubsidized student loans are both types of federal student financial aid. They are collectively known as Stafford Loans and students apply for the loans using the FAFSA. Both types of loans must be paid back. Repayment on both types of Stafford Loans begins following a 6-month grace period after a student graduates, drops below half-time status, withdraws or is dismissed from school. The main differences between the two types of student loans is how interest is handled while a student is in school and the borrowing limits.

Subsidized Student Loans

Although interest is charged while a student is in school, a subsidy pays that interest. From a student’s perspective, interest doesn’t accrue until repayment starts. This makes the loans less expensive in the long term.

Subsidized student loans are need-based aid. To be eligible for a subsidized student loan, a student’s cost of attendance, a set number determined by the school, must be greater than the Expected Family Contribution (EFC) calculated from information provided on the FAFSA.

Unsubsidized Student Loans

Unsubsidized loans treat the interest more like a standard bank loans. Although repayment doesn’t begin until 6 months after a student graduates or withdraws, interest accrues and is charged to a borrower. Interest accrues from the date that the funds are disbursed. Students can choose to pay the interest while they are in school, or capitalize the interest and add it to the principle. Capitalizing interest allows students to defer all payment on the loan until after they leave school, but since the interest increases the principle amount, the total cost of loan repayment is greater.

Unsubsidized loans are not need-based aid, so students can get financial aid through the unsubsidized portions of the Stafford Loan programs regardless of their calculated need. Students who are not eligible for subsidized loans can still borrow up to the annual limit using unsubsidized loans.

Loan Limits for Subsidized and Unsubsidized Loans

The Department of Education sets annual borrowing limits for the Stafford Loan programs, depending on the student’s level. Graduate students can borrow the same amount each year of their programs, but the limits for undergraduate students increase for the second and third years of a course of study. Only part of the total annual limit can be subsidized. Students who qualify for the maximum subsidized loan amount may also have unsubsidized loans in their financial aid award package to make up the maximum loan amount.

Both dependent and independent undergraduate students have the same borrowing limits for subsidized loans, but the overall borrowing limits for independent students is higher, meaning they can borrow more through the unsubsidized loan programs than dependent students can even if they qualify for the annual maximum through the subsidized loan program. Students can combine both subsidized and unsubsidized student loans into a single consolidation loan after they enter repayment.


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