What’s the difference between a federal unsubsidized and subsidized student loan?
Both loans have the same interest rates, and interest accrues (grows) on both from the moment your school gets the money. The difference is who pays the interest while you’re in school—you or the government.
Unsubsidized loans: With an unsubsidized loan, you're responsible for the interest from the moment the amount you borrow is disbursed (sent) to your school. Unlike a subsidized loan, the federal government will not help with interest that accrues. Unsubsidized loans are available to both undergrads and graduate students. When you start paying back your unsubsidized loans, your repayment will include the original amount you borrowed and the interest that has accrued.
Subsidized loans: Federal subsidized loans are based on financial need (as determined by the FAFSA®). In effect, the government will pay the interest for you while you’re in school (if you’re enrolled at least part-time), during your grace period, and if you need a loan deferment. When you leave school, the government stops paying your loans’ interest. You’ll repay the original amount that you borrowed and the interest that starts to accrue (grow) from that moment. Subsidized loans are only available to undergraduates, and there’s usually a lower loan limit than with an unsubsidized one.
So why would anyone ever take out an unsubsidized loan?
As we’ve mentioned, both types of federal loans are only available when you apply for aid through the FAFSA®.
If you qualify for a subsidized loan, you should usually take it, since you can save money with it. If you don’t qualify, however, there are two plusses to getting an unsubsidized loan:
- You don’t have to demonstrate need for an unsubsidized student loan, so you can usually borrow more money.
- You can use the funds to pay for a graduate degree.
Generally, you’ll find out which types of loans you’re eligible for when you receive your school’s financial aid package.
The FAFSA® is key
If you need to take out a loan to pay for college, know that you’re not alone. College is expensive and no one expects you to have planned for everything. Just be sure to file the FAFSA®—it’s the key to all federal financial aid, including college scholarships, grants, and your eligibility for subsidized and unsubsidized student loans.