One of the hardest concepts for new college students to understand as they examine their financial aid package is the difference between subsidized and unsubsidized loans.
Though these loans function in two very different ways, they both accomplish the same goal by making education easier to afford in the short-term.
Before accepting any financial aid package, however, students should make sure that they understand the key similarities and differences of subsidized and unsubsidized programs, paying careful attention to how each loan might affect their repayment schedule as well as their ability to make full, timely payments on the loan’s outstanding balance.
What is a Subsidized Loan?
Simply put, a subsidized loan is a student loan that does not accrue interest while a student is enrolled at least half-time in an accredited degree program. Unsubsidized student loans typically include the Stafford Loan and the Perkins Loan, though the Stafford Loan also has an unsubsidized component as well. The government will pay for, or subsidize, all loan interest fees until either three or six months after the student graduates from school or leaves the institution for other reasons.
What is an Unsubsidized Loan?
Unlike a subsidized loan, an unsubsidized loan will accrue interest while a student is enrolled in school, no matter how many credits they are currently taking. The government does not pay for, or subsidize, these interest payments. Students do typically have the option of paying just the interest on their loan each month while in school, and this option can actually help students save a significant amount of money over the long-term. Unsubsidized loans typically include at least half of the Stafford Loan for undergraduate students, or the full amount of the Stafford Loan for graduate, professional, and doctoral students. Private student loans from major banks are also unsubsidized.
Should Unsubsidized Loans Be Avoided When Accepting Financial Aid?
One of the things to keep in mind is that, even though an unsubsidized student loan is more expensive over the long-term, it may be necessary in order for students to afford the full cost of tuition while they’re enrolled. There is nothing wrong with taking advantage of an unsubsidized student loan if it is needed to pay for tuition, room and board, or the high cost of college textbooks. Generally speaking, government interest rates on these loans are still lower than those charged to students with private loans, and this does result in a significant savings when comparing both options.
The best way to handle an unsubsidized loan from the government is simply to opt for monthly interest payments while enrolled in school. In almost all cases, these interest payments cost only a few dollars per month. Over the course of four or six years, however, they amount to a major savings that can lead to lower student loan payments each month after graduation.
Loan Subsidization is a Key Part of Evaluating Financial Aid
Students have many options when accepting financial aid, including the ability to accept only subsidized student loan funds if they can make their budget work. Otherwise, students should keep in mind how each loan option works and accept only the funds that they absolutely need in order to find their higher education. Both subsidized and unsubsidized loans will help students offset tuition costs and pursue a college degree full-time, and that may simply be more valuable than the interest rate charged to unsubsidized balances.