Subsidized vs Unsubsidized Student Loans: Which Is Best?

Getting higher education under financial struggles can be daunting for students and their parents. Specially, for the professional courses that cost a lot, students often look for financial aid. Federal student aid is a provision through which students get financial support to cover their educational expenses.

The Federal student loans have backing from the US government, and the repayment terms are extremely student-friendly. There are two major categories under it: subsidized and unsubsidized loans. 

In this article, we will discuss both categories in detail. At the end, we will compare the two to help you understand which student loan type would be appropriate for you. 

What is a Subsidized Loan?

A Direct Subsidized Loan is offered by the US government to eligible undergraduate students. The student will have to demonstrate his financial need, and if the financial body and the government deem it fit for aid, the loan amount gets disbursed.

The highlight feature of this student loan type is that the government will pay the interest amount while the student is still enrolled in college. 

Students applying for this loan have to fill out their free application for Federal student aid on fafsa.gov. After this, the school will determine how much amount the student can borrow to meet his educational expense requirement.

The interest rate for these student loans is fixed until the end of the loan term. 

What is an Unsubsidized Loan?

A Direct Unsubsidized Loan is available for both graduate and undergraduate students through the US government. In this loan category, the interest gets calculated right from the month the loan gets disbursed until the loan is completely repaid.

So, if the student is not willing or not in a position to pay the interest during the study years, it will keep accumulating, and the final amount will increase exponentially. 

Your financial need decides your eligibility for the unsubsidized loan, and the school decides the total amount, like in a subsidized loan. It is significant to note that the interest rate for these student loans is higher than direct subsidized loans. 

Eligibility Requirements

Eligibility is the basic requirement that a student should fulfill to be able to get the desired financial support. It typically includes financial need, enrolment status, and multiple other factors. Let us discuss the eligibility for subsidized vs unsubsidized loans.

For Subsidized Loan

Eligibility terms for Federal Direct Subsidized Loans:

• Students need to demonstrate their financial need as decided by FAFSA. 
• Enrolment into a degree or certification program in the partner institution. 
• The student should maintain good academic progress as defined by the school. 
• There should be any previous loan default in the name of the applying candidate.
• Students should be a citizen of the US or a non-citizens with a valid security number.  

A student qualifying these eligibility criteria can get a subsidized loan to cover all the educational expenses. 

For Unsubsidized Loan

Eligibility terms for Federal Direct Unsubsidized Loans:

• The applicant needs to fill out the free application for Federal student aid. It is mandatory to file this application to determine eligibility. 
• Students should be enrolled in an eligible degree program at a partner institute. 
• Throughout the study tenure, the student should maintain academic progress as defined by the school.
• There should not be any loan defaults in the name of the student. 

Both graduate and undergraduate students qualifying for these eligibility terms are eligible to apply for Federal unsubsidized student loans. 

How Much Can I Borrow?

For Federal Subsidized Loan

The amount you can borrow through a Federal subsidized student loan depends on the number of years you will spend in school and your dependency status. Moreover, your loan amount also varies as you move to a higher level during your undergraduate program. The tentative annual loan limit is as mentioned below.

• First Year: Upto $3500
• Second Year: Upto $4500
• Third Year: Upto $5500 

It is significant to note that the exact loan amount you get is determined by the school. 

For Federal Unsubsidized Loan

The amount you can borrow through ​​a Federal unsubsidized student loan is based on your academic level and dependency status. Moreover, as these loans are available for both graduate and undergraduate students, the amounts will vary accordingly. The tentative loan limits are as mentioned below.

First-year

• Dependent students get up to $5500
• Independent students get up to $9500

Second year

• Dependent students get up to $6500
• Independent students get up to $10,500

Third Year

• Dependent students get up to $7500
• Independent students get up to $12,500

Maximum Eligibility Period 

For Federal Direct Subsidized Loan

The eligibility period is generally 150% of the total time of the academic program for which you enrol. For example, if you are in an undergraduate program of four years, the subsidized loan limit is up to six months.

It is significant to note that failing to repay within this stipulated time would mean losing the opportunity to apply for subsidized loans further.  

For Federal Unsubsidized Loan

Unlike subsidized loans, there is no maximum eligibility for unsubsidized loans. As long as you fulfill the eligibility criteria and remain enrolled in an eligible program in a partner institute. Though there is no limit on the maximum eligibility period, the loan limit still exists. 

Interest Rates and Origination Fees 

For subsidized student loans, the interest rate is fixed throughout the loan period. The present interest for these student loans is 5.50%. The origination fee in this category is 1.05% of the loan amount. This amount gets deducted before disbursing the loan amount into your account. 

For unsubsidized student loans, the interest rate for undergraduate students is 5.50% and for graduate students, it can go up to 7.05%. The origination fee is the same as the subsidized loans, 1.05%. 

Loan Repayment Options

The repayment plans for Federal Direct Unsubsidized and Subsidized Loans are similar. Some of the popular options are listed below. 

• Standard repayment where you have fixed monthly payments; it keeps the total paid amount predictable till the end. From the beginning, you know how much you will be paying which helps in proper financial management. 
• Graduate repayment is where the payments are low in the beginning but it increases gradually as the loan tenure ends. This is helpful as your monthly installment increases after you have become a little more financially stable. 
• Income-driven repayment decides the monthly payment amount on the basis of your earnings. It is apt for students who are not sure about their earnings in the near future. 
• Pay as you earn is another repayment plan wherein your monthly payment is based on your earnings and your monthly family expenses. It is an extremely borrower-friendly option for better financial management. 

There is an eligibility criterion for each repayment plan. So, you can discuss the same with your financial institution. It is significant to note that the difference between subsidized and unsubsidized loan repayment is only in the way you manage your interests.

As the government pays your interest for a certain period of time in subsidized loans, the total amount paid is less than that in an unsubsidized loan. Hence, your choice of repayment plan may also vary depending on this factor. 

Subsidized v/s Unsubsidized Loans 

We have discussed the subsidized student loans and unsubsidized loans in detail. The table below gives direct subsidized vs unsubsidized loans on the basis of various parameters for better understanding.

Conclusion

Federal Direct Subsidized and Unsubsidized Student Loans are for the students to get financial support for higher education. However, these two categories vary based on different factors, like who can borrow them and at what interest rate.

While the subsidized loans are for undergraduate students, the Federal unsubsidized loan is available for both graduate and undergraduate students.

So, while you are exploring these options, make sure you refer to the differences between the two to understand which category would be apt for you. It is crucial to research and understand all the terms before you sign the final agreement to enjoy a smooth and fuss-free loan program.