Paying for college can be difficult for families. Saving for college and applying for scholarships and grants can go a long way toward paying the bill. Still, even with a healthy savings plan and lots of financial aid, many families will need to take out student loans to cover the cost of college.
If this is the case for your family, it is important to know that you are not alone.
The market reports that about 70 percent of students take out some type of student loan to pay for college. The vast majority of these student loans are federal loans.
92 percent of student loans are federal loans. There are many benefits to federal loans, but it can be difficult to understand the differences between all types of loans. Here’s what students need to know about subsidized versus unsubsidized loans and which one is best for you when it comes to paying for college.
Federal loans start with the FAFSA
The process for applying for federal student loans begins with the FAFSA. In addition to financial aid like grants and scholarships, the FAFSA is necessary for families to qualify for federal student loans. Even if you don’t expect to qualify for need-based financial aid, you still need to file the FAFSA if you plan to apply for a federal loan.
When you complete and submit the FAFSA, federal student loans, also known as Direct Loans, are often included as part of your financial aid package. As part of that financial aid package, the FAFSA helps determine how much student aid you are eligible to receive.
Each type of federal loan has its drawbacks and benefits. So what are the differences between subsidized and unsubsidized loans, and what do these terms mean?
What are Direct Subsidized Loans?
Your first choice when it comes to federal loans is probably the Direct Subsidized Loan. Sometimes called Stafford Loans or Direct Loans, these loans should be your first choice when it comes to borrowing for college.
Direct Subsidized Loans are based on financial need, rather than credit or payment history. That means a credit check is not required to qualify for a subsidized loan. Your school determines how much you can borrow, and it can’t be more than your financial need.
It is also important to note that Direct Subsidized Loans are only available to undergraduate students. If you’re looking for a loan to finance your graduate or professional degree, you’ll need to consider other options.
The biggest advantage of subsidized loans is how interest is applied. In a subsidized loan, the federal government pays the interest on the loan while you are still in school at least half time. (Part-time enrollment generally means taking at least six credit hours of classes.) This means that interest is not added to your total payment balance while you are in school, unlike other loans.
Another important thing to remember about direct versus unsubsidized subsidized loans is the total amount you can borrow. Studentaid.gov shows how much of your loans can be subsidized for each year of higher education. This is also known as your aggregate loan limit.
The total loan limit is essentially a cap on the amount students can borrow each year for school. It prevents students from giving more than they need to keep them out of difficult financial situations. Of course, sometimes you will have to borrow beyond the amount allowed for subsidized loans. Fortunately, there are other federal options in the form of unsubsidized loans.
What are Direct Unsubsidized Loans?
One of the biggest differences between subsidized and unsubsidized loans is who can qualify. Unlike subsidized loans, Direct Unsubsidized Loans are available to all students, regardless of financial need. That includes both graduate and undergraduate students.
However, like subsidized loans, your school determines how much you can borrow. Although not based on financial need, colleges determine this amount based on your cost of attendance and other financial aid.
The other key differentiator is that, unlike subsidized loans, the federal government does NOT cover the interest while the student is in school. Interest will begin to accrue as soon as the loan is disbursed. Any interest that has accrued on the loan before the borrower leaves school will be capitalized back into the principal amount of the loan.
That means if your loan was for $10,000 and you accrued $1,000 in interest during school, your loan is now for $11,000 instead of $10,000. A slightly higher principal may not seem like much when you graduate, but you can pay potentially thousands of dollars more over the life of your loan.
This is an important benefit of paying student loan interest while you are in school. If you can change it, any interest you can pay while you’re still in school can help greatly reduce the total amount you pay overall.
NC Assist Can Bridge the Gap When Federal Loans Aren’t Enough
We hope this helps you understand the key differences between subsidized and unsubsidized loans. Now you should be ready to make an informed decision about taking out school loans.
Even with a mix of subsidized and unsubsidized loans, it may not be enough to cover the full cost of college. An alternative private loan can be an effective way to bridge the gap to cover the cost of attending college.