Subsidized & Unsubsidized
Federal Student Loans - What's the difference?
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One
of the first questions on the mind of any financial
aid student when they receive their first award letter
(and for many, still a question long after that) is,
"What is the difference between subsidized and unsubsidized
federal student loans?"
Even if just for their names, these two can be a little
bit confusing. That's not to mention the questions that
can come up once you see how much of each your school
is offering you for a given year. So, here are the basics,
quick and simple.
Similarities
Both types of loans are offered through the Federal
Direct, or the FFEL Stafford Loan programs. These programs
are designed and administered through the federal government,
and are offered at most all state universities and established,
private institutions. - If you are a college student
in America, chances are these loans are available to
you.
Both types of loans must be repaid. Though the terms
and conditions of the loans are set by the federal government
(generally making them the best loan options students
have), the system is set up so that the actual money
comes from and is paid back to private institutions.
That means banks. - When you take out your loans you
should be given your choice of lender banks. This is
the bank you will owe to when your loans enter repayment.
Both types of loans are typically deferred until six
months after a student is no longer enrolled in school
for at least half time. This can be a tricky one if
you decide to take a semester or two off during your
education. Just remember, everyone is entitled to one,
full, six-month deferment, regardless of whether they
graduate, drop out from partying too much, or have to
stop and go earn more tuition money. (Both happen to
the best of us.)
If you are out of school for a period of less than six
months at any time, that full six-month deferment you're
entitled to will still be there when you really are
finished with school. It's not like you're using up
any of that time for taking just one semester off. If
you stay out for six months or more before you go back
though, you will likely be asked to start making loan
payments directly after graduation, because your six
month deferment has been used.
Differences
Now for the three major differences between the two,
subsidized and unsubsidized.
1) Interest - With subsidized loans the government
covers the interest payments for you while you are in
school and/or in deferment. The loan accrues interest
just like any other. You're just not responsible for
paying any that accrues before you enter loan repayment
on the principle. Students who take out $10,000 (for
instance) in subsidized loans, find that, six months
after they leave school, they basically owe $10,000
plus whatever interest that gets charged after they
start repayment, whenever that might be.
When you take out unsubsidized loans, you are responsible
for all the interest that the loan(s) accrue. While
you are in school, and during your deferment period,
you will be given the choice of making voluntary payments
on that interest. Making payments like this is a good
idea if you are able; it keeps you from being charged
interest on your interest. Any interest you choose not
to pay as it comes up will be added to the principle
of the loan.
2) Loan Limits - The federal government puts
limits on how much of these loans a student can receive
during a given year, and over their lifetime. These
limits are strictly enforced upon the schools who administer
aid, as well as all other agencies involved. Undergraduate
freshman, for instance, are eligible for a total of
$7,500 in total federal loans in one academic year.
No more than $3,500 of that amount can be made up of
by subsidized loans. The limits go up with your grade
level, but just remember for now, there is a limit each
year to how much subsidizing the government is going
to do for you each year, even if you would otherwise
qualify for more just based on financial need.
3) Financial Need - Subsidized loans are need-based.
Unsubsidized loans are not. Your level of financial
"need" gets represented by specific numbers calculated
from the information you put on your FAFSA application.
Without getting in to all the particulars, students
who have greater levels of financial need qualify for
subsidized loans that those with less need don't. Even
if you have no "need" at all (according to the government's
reckoning) you can still be offered and receive unsubsidized
loans.
Knowing these three little facts can save a lot of confusion,
and a surprising amount of money, for you through your
college career. If you are ever in a position where
you are being offered a combination of subsidized and
unsubsidized loans, and you only need to take out half
of what's being offered, go for the subsidized.
Remember that even if you've been told you have "no
need" because your parents make too much money or something,
there's still a good chance unsubsidized federal loans
are the best option for you. And remember; don't take
out loans you don't need, no matter how good the deal
might look.
Author: Kevin Hodges worked as a college financial
aid counselor at a major university before moving on
to a freelance writing career.
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