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Subsidized vs. Unsubsidized Student Loans: Understand the Difference

Education is key to making the right choice about paying for higher education. While you’re likely familiar with the two main types of student loans – federal and private – understanding the nuances of the choices within federal loans is important. Below we’re tackling the differences between subsidized and unsubsidized federal student loans.

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Subsidized Loans Unsubsidized Loans
You need to demonstrate a financial need. You do not need to demonstrate financial need.
Only available for undergraduates. Available for both undergraduate and graduate students.
The government pays, or subsidizes, the interest on the loan while you’re in school, during your grace period, and during any other deferments. You pay all the interest, including that which accrues during school, during your grace period, and during any other deferments.

How much can you borrow with Federal student loans?

Generally known as Stafford Loans, these subsidized and unsubsidized federal student loans are given to eligible students at thousands of colleges, universities and technical schools across the country.

Your school determines how much you can borrow based on a variety of factors, such as cost of attendance and dependent status. With slightly better terms designed to help out lower-income students, subsidized loans are generally the less expensive option.

Who can take out subsidized and unsubsidized student loans?

Subsidized loans are awarded only to undergraduate students and are based on financial need and cannot exceed that amount.

Unsubsidized loans are available to all students regardless of need. Loan limits are slightly higher for unsubsidized loans; as a result, many students borrow more than the actual cost of their tuition in order to cover fees and other education-related expenses. If federal loans don’t cover all the costs, private student loans can also be used to pay for education.

However, before signing for loans, really look at how much you’re borrowing and whether you need as much as you’re taking. Accepting more money than you need can add thousands of dollars to your total debt and make it more difficult to afford your future monthly payments.

Who pays the interest?

How interest is handled is the biggest difference between subsidized and unsubsidized student loans. The U.S. Department of Education pays the interest on subsidized loans so long as you maintain at least half-time enrollment, as well as during any deferments and for the first six months after you leave school.

With unsubsidized loans, you’re responsible for paying interest on unsubsidized loans at all times – though you can choose (in certain situations) to let interest accrue and be added later to your loan balance. Squeezing those interest payments into your monthly budget can save you money in the long term and plant the seed for a lifetime of good financial habits.

The differences between subsidized and unsubsidized student loans are critical to understanding if you’re planning to take out student loans. If you’re at the beginning of your education and applying for loans, start by filling out a Free Application for Student Aid (FAFSA) application.  If you have already graduated, applying for federal student loan consolidation or refinancing can give you even greater control over your financial future.

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