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Which is Better: Subsidized vs Unsubsidized Loan

subsidized vs unsubsidized loan

Loan repayment can take an extended period, sometimes up to 30 years. Choosing the right loan program ensures that the repayment is more affordable. Meanwhile, you can end up in big trouble with the wrong loan program. Which loan is better: subsidized or unsubsidized? Should you get a Subsidized or Unsubsidized loan? Find out answers to these questions in this guide. We discuss the details of both loan types and compare them to establish some initial expectations on your options. 

Direct Loans

A Direct loan program is also called a William D.Ford Federal Direct program. The program aims to provide funding to students and their parents so that they can afford educational expenses. As its name suggests, the funds are provided directly by the Education Department. Additionally, the government backs this program which was created in 2010. Currently, there exist four different loan categories under Direct loans:

  • Direct Subsidized
  • Direct Unsubsidized
  • Direct PLUS
  • Direct Consolidation

We will discuss each option shortly in the subsequent section. In this way, even if you do not qualify for Subsidized or Unsubsidized loans, you can find a suitable program. 

Such centralization of loan programs helps the government to have better control. Instead of getting loans from different lenders, federal borrowers receive them from the Education Department. Currently, the loan portfolio is worth $1,5 trillion. Unfortunately, many borrowers struggle with repayment due to the challenges of the COVID-19 pandemic. This guide will also discuss debt resolution strategies quickly. 

What is a Direct Subsidized Loan?

subsidized vs unsubsidized loan

Direct Subsidized Loan is a loan program available to undergraduate students. The vital part of eligibility requires demonstrating financial need. Only those applicants that have a high financial need for additional funding can become eligible. 

As the program is based on financial difficulties, the loan terms are more favorable. Sure, borrowers with low incomes will not be able to afford high loan payments. Hence, if you compare a subsidized vs unsubsidized loan, the interest rate for this program is comparatively low. 

What is a Subsidized Loan?

We explained what a Direct Subsidized loan is. However, a Subsidized loan has a special meaning. The word ‘Subsidized’ means that the borrower would not pay interest while studying. During this time, a bank or the government, in the case of a Direct loan, pays the interest instead of the borrower. 

Once the borrower becomes eligible for repayment, they pay both the original debt balance and the interest. Usually, the borrower is required to repay debt six months after graduation. Alternatively, if a student quits enrollment or falls below half-time, repayment will start. 

What is an Unsubsidized Student Loan?

The name of this loan already explains the difference between a subsidized vs unsubsidized loan. Unsubsidized loans are not based on financial need. The borrowers do not need to be in financial difficulty to get this funding. Such a feature makes Unsubsidized loans both attractive and undesirable. 

On the one hand, as financial need is not essential, it is easier to become eligible and enjoy the funding. On the other hand, financial need equals better loan terms. If financial need is not a concern, you will not also get excellent terms. For example, your interest rate will be high.

What is a Direct PLUS Loan?

If both options seem not suitable for your needs, a Direct PLUS loan can be helpful. Direct PLUS loan covers the portion of educational expenses not funded by other financial aid programs. There exist two types of PLUS loans. First, Graduate PLUS loans are available to graduate and professional students. Next, Parent PLUS loans are available to parents of undergraduate students. 

Different from Subsidized or Unsubsidized loans, a credit score check can be essential for PLUS loans. Hence, you need to have a good credit history to become eligible. 

The interest rate for a Direct PLUS loan is 6.28%, both for parents and students. 

What is a Direct Consolidation Loan?

The Consolidation program aims to combine multiple loans into one. As a result, the borrower has a single loan to deal with. Loan consolidation is usually free, and it helps borrowers if they feel lost among multiple repayment responsibilities. 

The combined Consolidation loan gets a new interest rate which is the weighted average of all your loans. Hence, it is not higher or lower than your current interest obligations.

Subsidized vs Unsubsidized Loan

Although we present you with different types of Direct loans, this guide focuses on a Subsidized vs Unsubsidized loan. These two loan programs are quite similar, with few significant differences. Generally, you apply and repay the debt in the same ways. However, eligibility requirements, interest rates, loan limits change based on which program you choose. 

To briefly explain, the most significant difference is financial need. As mentioned before, the Subsidized loan is based on financial need, and the borrower should prove financial difficulty to get a loan. However, it is not necessary for Unsubsidized loans. Besides, the Subsidized option is only for undergraduate students.

Finally, the loan limits differ and are generally lower for Subsidized loan programs. In contrast, Unsubsidized loans do not require financial need, are available to graduate/professional students, and have more challenging loan terms than Subsidized loan programs. We will explain each difference in detail in subsequent sections. 

1. Eligibility Conditions

One of the main elements of a Subsidized vs Unsubsidized loan is financial need. Subsidized loans are based on financial needs. Students whose families are poor and face extreme economic challenges can become eligible for this loan program.

You might wonder how financial need is determined. Generally, the Education Department uses a formula that deducts Expected Family Contribution from Cost of Attendance to determine the need. If the difference between these two elements is high, the student is eligible for Subsidized loans. On the other hand, slight differences can show a lack of financial need. In this case, borrowers are better off if they apply for Unsubsidized loans. 

But why is financial need important? If a student has economic challenges, it is logical that they will not be able to pay high interest every month. Hence, such loans have lower interest rates which make them cheaper. Therefore, financial need is tricky. On the one hand, it makes loans more attractive by lowering interest. On the other hand, it is hard to demonstrate economic challenges. 

In addition, your education type matters. If you are an undergraduate student, you can apply for a DS loan. Meanwhile, undergraduate, graduate, and professional students can apply for Unsubsidized loans which do not require financial need demonstration.

2. Loan Limits

subsidized vs unsubsidized loan

Another element of a Subsidized vs Unsubsidized loan is loan limitation. Loan limits indicate how much you can borrow, and it depends on loan type and study year. Besides, aggregate and annual limits depend on the status of the students, like dependent or independent. 

Keep in mind that the annual limit shows how much you can borrow per academic year. Meanwhile, the aggregate loan limit indicates how much you can borrow overall for your education. For instance, if you are in your first year and you are a dependent student, your annual limit can be $5,500. From this amount, $3,500 belongs to Subsidized loans. As the years’ pass, your limits can increase. 

Generally, undergraduate loan limits are higher if the student is independent. Yet, the amount eligible for Subsidized loans is the same. 

If you are a graduate or professional student, you have independent status. Such borrowers can only get unsubsidized loans, but their limits can be higher, such as an annual limit of $20,000. It is advisable to check loan limits on the official Student Aid website before applying. Additionally, keep in mind that if you exhaust the limit, you cannot borrow anymore. You first need to repay your existing loans to qualify for more. 

3. Repayment Differences

If you compare a Subsidized vs Unsubsidized loan, you might notice differences in the repayment process. Generally, both loan borrowers start repayment six months after graduation. Alternatively, if students stop enrollment or their education falls below half-time, they become eligible for repayment. 

There exist various repayment plans accessible to federal loan borrowers, like Standard, Graduated, Extended, and Income-Driven repayment options. Almost all repayment plans are available to both Subsidized and Unsubsidized loan borrowers. Yet, there exist some differences. For instance, if you decide to enroll in the Revised Pay as You Earn program, your repayment period will change depending on your study type. Undergraduate students repay debt in 20 years, while graduate students repay debt in 25 years.

Additionally, the repayment amount will be different due to varying interest rates. We will discuss interest rates in the following section. 

4. Interest Rates

One of the most critical factors of a Subsidized vs Unsubsidized loan is the interest rate. Interest rate indicates how much more you will pay in addition to the original balance. Hence, higher interest rates are not desirable. The lower the rate is, the easier the repayment is. 

As Unsubsidized loans are based on financial need, they have lower interest rates. It is reasonable that financially struggling borrowers do not have much money to afford the repayment. 

The current federal interest rate for undergraduate students is only 3.73%. This rate is applicable to both Direct Subsidized and unsubsidized loans if you are an undergraduate student. However, you will need to demonstrate the financial need for Subsidized loans. But, if you are a graduate or professional student applying for Unsubsidized loans, the rate increases to 5.28%.

Keep in mind that the rates are effective only for one year. The current rates are accessible till June end, 2022. After this period, the rates will be revised. They can lower or raise depending on the economy. Specifically, the rate depends on the auction of 10-year Treasury notes.

Therefore, it is hard to forecast what the rate will be for the following year. For comparative purposes, the last rate undergraduate loans had 2.75%, and graduate/professional loans had a 5.3% interest rate.

5. Fees

Federal loans are cheaper than private student loans. Although the interest rate is usually lower, the federal loans also involve some fees. We have already discussed the difference between a Subsidized and Unsubsidized loan in terms of interest rate. Now, let’s check if there is a difference in terms of fees. 

The loan fee is applicable to both Subsidized and Unsubsidized loans. This cost is for one time rather than being continuous. Fortunately, the rate is the same for both loan types. However, what matters is when you get your first disbursement. If you receive your loan between October 2020 and 2022, you will pay 1.057%. It is possible that the whole loan fee will not be deducted immediately. The school might deduct the fee in two or more disbursements proportionally. 

6. Application Process

If you are lost between Subsidized and Unsubsidized loans, luckily, the application process will not challenge you. There is almost no difference between a Subsidized vs Unsubsidized loan when it comes to the application process. 

However, it is not a coincidence. The Education Department centralized the application for student aid programs to make it easier for applicants. Hence, you need to fill a Free Application for Student Aid or FAFSA to request a loan in both cases. After request, the school analyzes the eligibility requirements and determines the amount of loan you qualify for.

If your application is successful, you should continue with further steps. For example, if you get loans for the first time, you need to complete the entrance counseling. This process helps borrowers to understand their obligations and set expectations for the future. Besides, it is essential to sign a Master Promissory Note which involves loan terms, like interest, repayment conditions, etc. Please, read it carefully before signing the document. 

7. Time Limitation

subsidized vs unsubsidized loan

Finally, it is worth checking a Subsidized vs Unsubsidized loan in terms of time limitation. Such limitation usually applies to Subsidized loans instead of Unsubsidized loans. Keep in mind that if you receive the first disbursement of a loan after July 2021, you do not need to worry about time limits. Generally, the limit shows how long you can finance your education through funding. 

Borrowers who received loans between July 2013 and July 2021 face time limitations. The rule is that they can get loans for a period which equals 150% of study time. For example, imagine you enroll in a four-year program. In this case, you can receive Subsidized debt for six years. 

Which Loan is Better?

After all these discussions, you might wonder, “which is better: subsidized vs unsubsidized loan?”. Unfortunately, there is no exact rule which can help you identify the best loan type. Instead, the answer depends on your qualifications. For example, if you are an undergraduate student, you can apply both. However, for Subsidized loans, you need to prove financial need. If you face financial difficulties, you can qualify for a Subsidized loan. Meanwhile, graduate or professional students can only apply to Unsubsidized loans.

Even if you like the requirements for a Subsidized one, you have no chance to apply for it. To sum up, the subsidized vs unsubsidized loan topic, if you want to find the best student aid type, you can contact third-party debt specialists, like those in Student Loans Resolved. Debt experts can analyze your qualifications and determine which loan type suits you better. In this way, you will not struggle with loan repayment in the future.