Subsidized vs Unsubsidized Loans: Five Crucial Differences

Student loans only become due after recipients graduate. This gives students the opportunity to focus on their studies and education. After all, the better that a student performs while they’re in school, the more likely it is that they will land a high-paying job. However, the terms of the financing and loans are determined before you start college. That is to say, the loan’s interest rate and the educational programs that it covers are outlined in the initial funding agreement. In fact, this is what makes subsidized vs unsubsidized loans different.

First of all, you and/or your family’s income define which of the two loan types you may get. Moreover, students should consider how much money they need. Otherwise, receiving too much or too little in funding could turn their collegiate career into a bumpy ride. Above all else, the interest rate and when it becomes due are important factors that students should consider.

Because of this, we put together five crucial differences between subsidized vs unsubsidized loans. Not only will this list help you pick the loan that you qualify for, but it also enables you to understand the financial limits, interest rate options, and more.

1. Subsidized vs Unsubsidized Loans: How Much Do You Need?

With both loan types, your school will determine your tuition fees and expenses. However, your family income and whether you’re dependent or independent will define the annual financial limits that you may get. First of all, subsidized loans are only available to students who need it. That is to say, if someone’s parents qualify for another source of funding or make enough money to pay for their child’s tuition expenses, the student doesn’t qualify for a subsidized loan. In addition, lenders will consider family income when a student is listed as a dependent on their parents’ tax returns. Independent students who have their own income must earn below a certain threshold in order to qualify for a subsidized loan. Otherwise, unsubsidized funding would be their alternative option.

Financial limits are equally as important. With subsidized loans, students receive a maximum of $3,500 and $4,500 during their first and second years, respectively. After that, they get up to $5,500 in each of their last two years. This is the case for both dependent and independent students that have a subsidized loan. With an unsubsidized loan, meanwhile, dependent students are only eligible for $2,000 per year throughout their college career. Independent students, on the other hand, get $6,000 in each of the first two years and another annual $7,000 during the latter two. Therefore, your financial needs should determine the type of loan that you qualify for and, at the same time, which one you should choose.

2. Your Level of Education

Keep in mind that subsidized loans are only available for undergraduate studies. Unsubsidized loans pay for both a bachelor’s education and professional or graduate programs. This is not to say that students can’t use a subsidized loan for their undergraduate degree and, after graduating, secure unsubsidized funding. However, a graduate or professional degree (such as law school) can only be paid for by an unsubsidized loan.

3. Time Limits

Subsidized loans have time limits that determine how long the funds are available for. In other words, students that don’t graduate on time can’t keep relying on a subsidized loan. This is because, after 150% of the original program’s time passes by, the loan will stop paying for your tuition. Since it normally takes full-time students four years to earn an undergraduate degree, 150% of that time is six years. These thresholds are adjusted for part-time students that receive subsidized funding. Unsubsidized loans don’t have these pre-determined time limits.

4. Payments and Interest Accrual

Unsubsidized loans start to accrue interest on the first day of your college career. Students can pay the interest (but not the principal amount) while they are in school. Otherwise, the accumulated interest will be added to the full loan amount, which is not due until after graduation. With a subsidized loan, the government pays the interest until the recipient graduates. In fact, when students get their degree, they have a six-month grace period before the first subsidized loan payment becomes due. Unsubsidized loans also have the same grace period. However, the student must pay the initial interest rate at one point or another. The government doesn’t cover these payments while an unsubsidized loan recipient is in college.

5. Interest Rates

When we compare subsidized vs unsubsidized loans, the interest amount is just as important as when it’s due. To put it another way, unsubsidized funding recipients could end up paying a lower rate. With a subsidized loan, the interest is fixed. Once the student graduates, the rate doesn’t change throughout the loan’s lifetime. Moreover, it is directly linked to the Treasury bond’s interest rate. Unsubsidized loans, on the other hand, allow recipients to secure a variable interest rate, which could increase or decrease over time. Similarly, unsubsidized funding could come with a lower fixed rate than its subsidized counterpart.

At the moment, interest rates are expected to remain at their lowest level in years during the immediate future. This certainly allows subsidized loan recipients who will graduate in the coming few years to save money. However, things do change over time, especially for incoming freshmen that will only graduate in four or more years. An unsubsidized loan doesn’t guarantee them a low rate, whether it’s a variable or fixed amount. However, they might be able to secure a smaller payment in comparison to a subsidized loan.

Making a Decision

In short, the five differences between subsidized vs unsubsidized loans are related to the qualification criteria, financial limits, graduation deadlines, and interest rates. Since the payments are not due until you get your degree, it can be easy to ignore these differences. Nonetheless, your choice should still revolve around your plan, financial needs, and the type of educational program that you plan on pursuing. Not only will this impact your graduation timeline, but the terms and conditions that apply throughout the lifetime of your loan.

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