When it comes to the cost of higher education, many students find themselves needing to borrow money. You can borrow from several private institutions, but the Department of Education has an answer for you as well.
You can apply for Direct Subsidized Loans and Direct Unsubsidized Loans. Each one is near identical, but there are a few key differences you need to be aware of before borrowing the tuition fees.
This article will examine the two loans in detail and show you the major differences between them that you need to be aware of. Knowledge is power, as they say, and knowing what your loan details are before borrowing will aid you in the long run.
Of all the differences in the two types of loans, the interest is the most notable and widely known. But how much do you know about the interest differences between subsidized and unsubsidized loans?
For starters, the subsidized loans and unsubsidized loans both accrue interest from the time they are lent until they are paid back. The one major difference is in the structure of the direct subsidized loans.
The federal government will pay the interest rate on your subsidized loan as long as you remain an active student with at least half-time status. This means that if you borrow $5,000 as a freshman in college when you graduate four years later your balance owed will be $5,000.
The interest rate will begin to be yours to pay six months after you finish school or drop below half-time status. At this point, the interest difference between the two loans is gone. However, you will start with a lower debt on your account as the government has paid your interest over the course of your active enrollment.
An unsubsidized loan, then, means you are responsible for paying the interest on the loan from the moment you receive the loan, even though school, while enrolled or if the loan payment is deferred.
Because the interest doesn't stop, you will need to pay at least that amount to keep your overall debt from climbing. Even while you are enrolled in school, the interest rate will accumulate. If you fail to make a payment while an active student, you will finish school owing more than you started with.
After graduation, the interest rates on both loan types are your responsibility and will continue to be added monthly to your account balance. The lower your balance, the less interest that is applied.
While you can defer your payments and the loan for a period of time, the interest continues to build. So while you may not be required to make a monthly payment during the deferment period, you will still have the added interest to pay off after the deferment ends.
Another difference between subsidized and unsubsidized loans is how you qualify for the loans. Each one has different qualification standards that must be met in order to be approved for the loan.
For example, when applying for a subsidized loan, you have to be able to show financial need for the loan amount. Your school will determine how much you need and the loan amount cannot exceed this total.
If you cannot justify, financially, that you require the loan, it will not be approved. These can be cases where the student is still living as a dependent on their parents, and the total household income is too high.
If you can show that you need the loan based on a financial means, it doesn’t guarantee the loan will be approved. You will still need to show other qualifications.
The next qualification is that you must be an undergraduate student. Postgraduate students do not qualify for subsidized loans. Because subsidized loans are based on financial need, they are different from unsubsidized loans, which are considered general loans.
Unsubsidized loans have a different qualification standard. As stated, they are general loans and your financial need is not required to be limited to a certain level or below. This means that the borrower must repay the entire loan amount, interest included.
Qualification, though is for both undergraduate and postgraduate students. It doesn’t matter at what level of education you are at to qualify for the unsubsidized loans.
This is the biggest difference in the qualification process for the two loan types.
There are limits for each type of loan, and they will vary depending on certain factors, such as your need, your ability to qualify and how much you qualify for.
Subsidized loans have a limit of $23,000 total. If your balance on a subsidized loan is $23,000 or higher, you cannot qualify for a new or second subsidized loan. Once you begin to pay it off, however, (and assuming you qualify for the total amount), you can borrow again up to the aggregate limit of $23,000.
To borrow again, though, you must still maintain a half-time student enrollment. If you have already graduated, you cannot borrow again. If you return to school later (to pursue a bachelor’s degree after obtaining an associates degree, for example), you can borrow again, providing you meet the other qualification criteria.
The unsubsidized loan has an aggregate limit of $31,000, which is higher than that of the subsidized loan. Where limits are concerned, this is the main difference. You also will not be able to re-borrow if your balance is higher than the aggregate limit.
However, unlike the subsidized loans, if you return to school for a postgraduate degree, you can apply for an unsubsidized loan. Of course, you will have to qualify through all other criteria as well as have a balance below the $31,000 limit.
Who Can Apply
Any student entering post-secondary education institutions such as community college, university, vocational or trade schools can apply for the loans. The difference between subsidized and unsubsidized loans for the application process depending on where you are in the educational ladder.
As we briefly touched on, subsidized loans are not given to postgraduate students. If you have a bachelor’s degree and are pursuing a masters or a doctorate, you will not be eligible to apply for a subsidized loan.
Vocational schools and trade schools are exempt as they only have a single tier. You can also apply for attendance with your loans at multiple trade schools. For example, if you borrow $8,000 to attend a cosmetology school, you can apply to borrow another $15,000 (up to the $23,000 limit) from the subsidized loan, to attend a mechanic trade school.
As long as you maintain half-time or full-time status the government will continue to pay your interest. Once you graduate, you have a six month grace period before you are required to begin repaying the loan (and interest) yourself.
If during that six month grace period you decide to enroll in another school or in a different course at the previous school, you can avoid the interest rates on the subsidized loan. Your interest will continue to be paid by the government while you are attending school.
Everything Else is the Same
When it comes to the differences between subsidized and unsubsidized loans, those are the only differences. Everything else about them is the same. You will be responsible for all interest on both loans after graduation or drop below half-time status.
The interest rates are the same for each loan as well. Your school will also be the deciding factor in how much you can borrow in both subsidized and unsubsidized loans. Once you apply and qualify, you will receive a package explaining how much you can borrow from each.
As you can see, there aren’t many differences between the two loan types. The differences they do have, though, are important. Qualification for the loans can be a bit tricky at first. It is easier to understand what qualifies than to try and figure out what doesn’t.
Level of education and need for financial aid are the two largest qualifying factors for subsidized loans. As long as you are an undergraduate student and can show the proper need for financial assistance, you can qualify for up to $23,000.
Likewise, undergraduate or postgraduate students can apply for up to $31,000 in unsubsidized loans.
The biggest difference though is the interest payments. With subsidized loans, the department of education will pay the interest on your loan while you are in school. Maintaining a half-time or better status will keep the loan active and your interest rate paid.
With unsubsidized loans, you are responsible for the total amount, including interest from the moment the loan is approved.