Subsidized Vs. Unsubsidized Student Loans

College degrees are very valuable because of the implications that they have on the future. The presence or lack of a college degree can determine the opportunities that are available to someone in life. While there are alternative routes to some career paths, there are some that you cannot enter without the requisite degree.

Consider a doctor, for example. There is no certification program that someone practicing medicine can take as an alternative to attending medical school. While this speaks to an underlying importance, it also speaks to the value that higher education holds.

Of course, there are also many costs associated with providing such an education to students. Therefore, tuition fees at colleges and universities aren’t typically very cheap.

According to a study conducted by CNBC, 70% of today’s college students only manage to get through their education because of the provisions made by loans. This means that only 30% of students don’t graduate with student loan-related debt.

While no one wants to be put in debt, loans exist to help people to take care of important needs immediately. A student’s focus is education; however, it is important to understand the concepts associated with student loans so you can select a loan type that is most appropriate for you.

Federal Direct Loan Program

Almost 75% of borrowers who have taken loans from the United States Department of Education have done so via the Federal Direct Loan Program.

This initiative allows tertiary level students to access loan facilities for education at low interest rates. The loans that are offered by this program have a set yearly ceiling. Each subsequent year allows for an increase in that amount. Applications for these loans are made by completing the Free Application for Federal Student Aid (FAFSA).

While the Federal Direct Loan Program offers five different types of loans, the ones that are important for the context of this article are the subsidized direct loans and the unsubsidized direct loans.

Both loan types are known for their favorable interest rates and the flexible options that are offered for repayment. Note, however, that the loan you choose translates to how much you are required to repay once your college tenure has ended. Additionally, you save more if you qualify for and obtain a subsidized loan.

Qualification Requirements

The difference between the loan types is the part that financial need plays in the application process. If you’re looking to acquire an unsubsidized loan, then there is no requirement in this area. However, if you want to get a subsidized loan, you must be able to verify your financial need.

Whether you go for an unsubsidized or a subsidized loan, you must be an undergraduate student with at least a half-time enrollment status. Note that graduate students can also qualify for unsubsidized loans, but they are not offered subsidized ones.

Loan Amounts

Unsubsidized loans typically offer an advantage in the area of raw cash value. The limits for these loans are set higher than those of subsidized loans. Dependent students can access up to $31,000, while independent students can enjoy up to $57,500. You can combine an unsubsidized and a subsidized loan; however, there is a cap of $23,000 of the aggregate limit of either that can be subsidized.

These figures apply to undergraduate students only, as graduate students only have a $20,500 limit annually for the unsubsidized loans that they can access. If you should include undergraduate loans, there is a limit of $138,000. Once this figure is reached, interest begins to accrue on the provided loan.

If a student gets a subsidized loan, there is a cap of $23,000. Any interest that accrues on the loan while the student is in college is covered by the Department of Education.

Interest and Repayment Terms

There is a 10-year repayment plan for both subsidized and unsubsidized loans. Of course, if your loan was unsubsidized, the figure that you are required to pay back is likely higher than a comparative subsidized loan.

The initial payments begin six months after the students graduate. Subsidized loan principals only begin to accrue interest when this payment schedule takes effect. Unsubsidized loan receivers would have seen interest accruing during the school tenure.

Note that the Department of Education continues to make interest payments for subsidized loans during the six-month grace period between graduation and the time the student begins to repay. If a deferment was done, the Education Department pays the interest during the deferment window. As usual, unsubsidized loan borrowers don’t get such a luxury. Interest accrues during the deferment window, which is then added to the loan.

There are income-driven, extended, and graduated payment options that can be used to cover the repayment.

The income-driven payment type is one of the most popular, as it allows for a great amount of flexibility in payment. The payment amount is typically calculated as a percentage of your discretionary income (which is also known as your net pay). You could set the payment to be as low as 10% of that figure, so that you have some breathing room. This allows you to extend your payment term past the standard 10 years. Of course, doing so means that you’re stuck paying your student loan over a longer time period, and it also means that there is more interest to pay in the long run.

On the bright side, interest paid on student loans is tax-deductible, which means that you can reduce your taxable income for the year. Up to $2,500 may be deducted in interest that you have paid on a qualified student loan.

You should also note that any payments that you make apply to interest before it is applied to your principal. Therefore, when you make payments, outstanding interest is always calculated and deducted, and only the remainder of your payment is allocated to the initial principal.

Acquiring the Loan

If you’re interested in getting any of these loans, the first step is to prepare and turn in the FASFA. Once you do so, you are provided with a report that illustrates the amount of federal aid that you can receive.

The report that you receive upon application also shows you the scholarships and grants that you may be considered for. It’s recommended to jump at as many of them as possible.

Remember that scholarships and grants don’t require you to pay them back, so there are no worries in that regard. Also, successfully landing scholarships and grants means that the loan amount that you need is reduced. This reduction translates to less or lower payments to make when your education has ended.

You may also want to consider work-study offers, as they can also go a long way in helping you with an alternative source of funding. This can be used to take care of both tuition and living expenses.

Period of Eligibility

As of 2013, limits were imposed on the length of time over which a student can continue to take loans under the subsidized loan umbrella. If you go the subsidized loan route, you can only continue to take loans for 150% of the official tenure of your program. Therefore, if you are doing a program that takes two years, you can only take loans for three years. So if you take four years to complete the two-year program for any reason, you cannot receive a loan for that final year because it is not calculated as a part of the official length of the program.

Unsubsidized loan users are not subject to this stipulation. There is no time limit where these loans are concerned.


The fees for these loans are not very steep. Currently, the loan fee is 1.059% for any loan that is disbursed prior to October 1, 2020. The fee is reviewed at intervals and adjusted. For example, it was 1.062% for loans between October 1, 2018 and October 1, 2019.

The fees are not covered out of pocket. Instead, upon receiving the loan, the payment is deducted from the total amount you receive. This is the reason that most students receive a loan that seems to have a slightly lower figure than the amount that was approved.

Each loan disbursement is subject to the fee, so it recurs for as long you’re enrolled in the school and still accessing the loan facility. Though you only receive 98.94% of the amount that you borrowed, you are required to repay the full amount. This is because the fee is independent of the loan, though it is deducted from it.

Interest Rates

While you can opt for private loans if you wish, one of the things that stands out about loans that fall under the federal umbrella is the incredibly low interest rates. Undergraduate students are only required to pay 4.53% interest annually, while graduate students are looking at 6% annually.

This is a much better alternative than using private lending institutions with rates that are upwards of 10% per annum. You should also note that these interest rates are not variable, which means that they stick around for the duration of the loan.

Important Notes

In the review of subsidized vs. unsubsidized loans, the subsidized option is always better if you can access it. Of course, you do need to demonstrate that you have a certain level of financial need before you are considered. Subsidized loans are superior because they result in you having less to repay when your education is complete.

The US Department of Education takes care of all interest payments while you’re enrolled in school, during deferment, and during the six-month grace period that you are allotted before you start repaying the loan.

This means that when you do start to repay, the principal begins to decrease in the same month, as there is no unpaid interest for you to cover. Remember that the payments you make only apply to the principal after the unpaid interest is deducted.

Unsubsidized loans accrue interest consistently, which is not paid until you start repaying your loan. Some students combine both subsidized and unsubsidized loans. If you are one of these students, you should always prioritize clearing the unsubsidized loan first. Doing so allows you to clear the loan with the higher interest first.

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