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Everything You Need to Know About Subsidized and Unsubsidized Loans

Have you ever noticed that the student loan world is full of super-specific, confusing words? It’s mind-boggling, especially when it feels like some of them are intentionally confusing. You might be scratching your head particularly hard over the words, Subsidized and Unsubsidized. So what do these words even mean? On a base level, these words describe federal student loans (more precisely, Direct Loans) for eligible students to aid in covering college costs. Let’s unpack them further.

What is the difference between Direct Subsidized and Unsubsidized Loans?

Here are the main distinctions of Direct Subsidized loans:

  • Direct Subsidized Loans are only available to undergraduate students with financial need.
  • Your school will determine the amount you can borrow (and that amount cannot exceed your financial need).
  • The U.S. Department of Education pays the interest on Direct Subsidized Loans that accrues while you’re in school at least half-time, for the first six months after you leave school (or your grace period), and during periods of deferment.
  • If you are a first-time borrower on or after July 1, 2013, there is a limit on the maximum period of time (measured in academic years) that you can receive Direct Subsidized Loans. You cannot receive subsidized loans for more than 150 percent of the published length of your program – also known as your “maximum eligibility period.”

Meanwhile, here are the defining characteristics of Direct Unsubsidized loans:

  • Direct Unsubsidized Loans are available to both undergraduate and graduate students.
  • You do not need to demonstrate financial need to qualify for a Direct Unsubsidized Loan.
  • You must pay the interest that accrues on a Direct Unsubsidized Loan during the lifetime of the loan.
  • If you don’t pay the interest while you’re in school, during grace periods, and deferment/forbearance periods, your interest will accrue and be capitalized.
  • There is no time limit on the maximum period of time that you can receive Direct Unsubsidized Loans.

Essentially, Direct Subsidized Loans offer better benefits but have more stringent requirements when it comes to financial need. If you qualify for subsidized loans, you’d be wise to choose these first. Who wouldn’t love having the government pay your interest while you’re in school? Talk about a money saver.

Who offers Direct Subsidized and Unsubsidized Loans?

The U.S. Department of Education offers Direct Subsidized and Unsubsidized Loans. Some people call them Stafford Loans or Direct Stafford Loans.

Because they are federal student loans, Direct Subsidized and Unsubsidized Loans come with all the associated benefits (e.g., repayment plan options, grace periods, forgiveness, forbearance, consolidation, etc.)

How do the interest rates compare?

The interest rate for Direct Subsidized and Unsubsidized Loans is the same for undergraduates at 5.05%. However, the interest rate for a Direct Unsubsidized Loan for graduates or professionals is 6.60%.

These interest rates are both fixed rates, as is the case with all federal student loans.

How do I qualify and apply for a Direct Subsidized or Unsubsidized Loan?

The Free Application for Student Aid (FAFSA) will determine if you qualify for Direct Subsidized and Unsubsidized Loans. FAFSA will also determine if you meet the specific demonstrated financial need requirements for a Direct Subsidized Loan. Ultimately, if your parents make too much money, you may not be eligible for a Direct Subsidized Loan.

To apply for a subsidized or unsubsidized student loan, you’ll need to complete and submit the FAFSA form. Your school will then determine how much student aid you are eligible for by using the information from your FAFSA. Your school will typically include any Direct Loans, subsidized or unsubsidized, in your financial aid package.

Are there any fees that come with these loans?

Yes. You’ll have to pay a loan fee for all Direct Subsidized and Unsubsidized Loans. This fee is a percentage of your loan amount and is proportionately deduced from each disbursement of your loan.

The fee percentage varies depending on when the loan is first disbursed. For instance, loans disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018, have a loan fee of 1.066%. Loans disbursed on or after Oct. 1, 2018, and before Oct. 1, 2019, have a loan fee of 1.062%.

What’s the best repayment strategy for Direct Subsidized and Unsubsidized Loans?

When you’re looking to make a repayment strategy, you’ll want to prioritize unsubsidized loans over subsidized loans. Why? It’s simple. Because your unsubsidized loans will accrue interest while you’re in school, they will have much larger balances than any subsidized loans (unless you were some sort of financial wizard and paid the interest while taking classes).

Paying off your unsubsidized loans with higher balances will save you on interest. It also means that you won’t have as much debt for interest to accrue on if you decide to go back to school or decide to seek forbearance of deferment.

If you have any questions about your subsidized and/or unsubsidized student loans, a Student Loan Advisor can help.

Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.