Many students end up borrowing money to pay for their college education, and many rely on student loans—federal, private, or both.
During the 2019-20 academic year, 34% of students turned to student loans to help cover the costs they couldn’t, according to the “How America Pays for College 2020” survey published by the lender Sallie Mae®.
Unfortunately, some students and their families may be unfamiliar with the various types of student loans available, how interest works, how that interest can affect the amount they end up paying over the life of the loan, and how they can best manage repayment.
Because so many students start their quest for tuition help by applying for federal student loans, it’s important to understand the difference between subsidized and unsubsidized loans offered by the US Department of Education.
Here are some basics about both subsidized and unsubsidized loans, which may also be referred to as Stafford Loans:
What is a Direct Subsidized Loan?
Direct Subsidized Loans are available only to undergraduate students, and they are awarded based on financial need, so the terms are a little more lenient than those for other federal student loans.
The US government pays the interest on federal Direct Subsidized Loans as long as the student is enrolled in classes at least half-time. The accrued interest is also covered during the six-month grace period after the student leaves school or graduates and if the student’s loan is in a period of deferment.
The federal help is meant to give students a chance to get on their feet financially before the debt starts accruing interest they’ll have to pay.
What is a Direct Unsubsidized Loan?
With a Direct Unsubsidized Loan, the government still lends a student money, but the terms are stricter in some ways.
Because the loans aren’t awarded based on financial need, borrowers are responsible for the accrued interest from the day their funds are disbursed. If a student chooses not to pay the interest while in school, it will continue adding up.
Interest also continues to accrue during the grace period, or during a deferment or forbearance period. The interest will “capitalize,” meaning it will be added to the principal balance, and the borrower will be charged interest on the higher balance, further increasing the overall cost of the loan.
Unsubsidized student loans can cost more in the long run than subsidized loans because of the accruing interest. There are a few more key differences worth noting:
• Unlike subsidized loans, unsubsidized federal student loans are available to both undergraduate and graduate students.
• Borrowers don’t have to demonstrate financial need, so it may be easier to qualify for an unsubsidized student loan.
• Annual and aggregate loan limits are higher for Direct Unsubsidized Loans than for Direct Subsidized Loans.
• The “maximum eligibility period” for Direct Subsidized Loans doesn’t apply to Direct Unsubsidized Loans. A maximum eligibility period is the max amount of time a student is able to qualify for subsidized student loans. The limit is generally determined by the published length of the program that the student is enrolled in.
So, those are some of the big differences between a subsidized loan vs. unsubsidized loan.
How Are the Loans the Same?
Obviously, there are some big differences between subsidized vs unsubsidized loans. But they also share similarities, including how each school determines how much its students can borrow during an academic year, (but the amounts they offer can’t exceed the government’s predetermined loan limits).
Those limits vary depending on whether the borrower is a dependent or independent student, and what year they are in school. For example, students in their first year of school typically get less federal loan money than those who are further along. And, of course, financial need is taken into account for Direct Subsidized Loans.
Generally, borrowers must be enrolled in a program that leads to a degree or certificate from the school to borrow either subsidized or unsubsidized federal student loans.
The interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduates is the same for undergraduates, and both are fixed rates. The interest rate for Direct Subsidized and Unsubsidized loans for the 2020-2021 school year is 3.73%. The rate for graduate or professional students receiving Direct Unsubsidized Loans, though, is typically higher.
A loan fee is charged on both types of loans. It’s a percentage of the loan amount, and that percentage may vary depending on when the loan was first disbursed.
Repayment for both types of loans begins six months after the borrower graduates, leaves school, or drops below half-time enrollment. Again, students are responsible for paying the interest on Direct Unsubsidized Loans once they’re disbursed.
Most borrowers will have 10 to 25 years to pay back a federal student loan, depending on their chosen repayment plan .
How Do I Get a Federal Student Loan?
The process to receive federal financial aid begins when the student completes the Free Application for Federal Student Aid (FAFSA®), which must be filled out annually. The form asks for information about the student (name, date of birth, address, financial information from tax forms and bank statements). If the student is a dependent, there will be similar questions about support from home that will help determine financial need.
Borrowers who don’t demonstrate enough need may not qualify for subsidized loans. Or they may be awarded a combination of both subsidized and unsubsidized student loans, or a combination of loans, grants, and work-study.
Based on the results of the FAFSA, the schools the student listed on the application will send a financial aid offer to the student, and the school will explain how to accept all or part of the federal financing. (Students can get an estimate of their eligibility for federal aid by using the FAFSA4caster .)
There are deadlines for filing the FAFSA. The FAFSA deadline is typically June 30, but each college and state may have its own deadlines.
What If Federal Loans Aren’t Enough?
If a student doesn’t qualify for federal student loans—or if more funding is required—there are other options for financing a college education.
SoFi strongly believes borrowers should exhaust all federal grant and loan options before going with a private loan lender. But private student loans can help fill the gaps if federal loans don’t cover all the costs of attending school.
These loans are offered by private lenders, including banks, credit unions, and online financial institutions, so the terms vary from one to the next—and the qualifications and terms will be different from federal loans.
Private student loans can have fixed or variable interest rates, and some lenders offer more competitive rates than others. (All federal loans have fixed interest rates.)
A borrower’s credit rating and income, among other factors, will generally be used to determine the interest rate and how much may be borrowed. (Those who need help qualifying could consider tapping a trusted student loan cosigner.)
Recommended: Do I Need a Student Loan Cosigner? – A Guide
Repayment terms on private loans also differ from lender to lender—and they’re generally less forgiving than the repayment plans offered for federal student loans. It’s important to understand what’s expected before signing for any type of loan.
The Takeaway
Subsidized federal student loans do not accrue interest while the borrower is attending school at least half-time. Unsubsidized federal student loans lack this benefit, and borrowers are responsible for interest that accrues as soon as the loan is disbursed.
Students looking for some extra help paying for their education may want to consider a private student loan from SoFi. Private student loans lack the same borrower protections as federal loans, but for some students, they may serve as a supplement to federal aid.
SoFi student loans have no origination fees, no application fees, no late fees, and no insufficient fund fees. SoFi offers loans for undergraduates, graduate students, and parents. Borrowers can find out if they pre-qualify in just a few minutes.
When it’s time to figure out how you’ll pay for school, it pays to understand all the options—starting with what’s available through the government and then looking at what private student loans have to offer.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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