Subsidized vs. Unsubsidized Student Loans: What’s The Difference?

What you will read about:

  • The difference between Subsidized vs Unsubsidized student loans
  • How interest works for subsidized vs unsubsidized student loans
  • Ways to avoid using unsubsidized student loans

Don't worry if you feel like you have to take a college-level class just to understand how student loans work – most people who have student loans feel the same way.

One of the most common questions student loan borrowers have is, “What does subsidized and unsubsidized even mean?”

When referring to student loans, borrowers want to know what is the difference between subsidized student loans and unsubsidized student loans, how much will they have to pay in interest and which is better.

The answer always boils down to how interest works!

Subsidized vs Unsubsidized Loans Quick Guide:

How does subsidized interest work?

The federal government pays the interest while the borrower is still in school.

What does subsidized vs unsubsidized mean?

A subsidy is a form of governmental financial support. In terms of federal student loans, the support boils down to whether the government covers the student loan interest (Subsidized) or they don't (Unsubsidized).

Which will cost me more in the long run?

Unsubsidized student loans cost more in the long run because of the accruing interest while borrowers are still in school.

Why do people even takeout unsubsidized student loans?

To qualify for unsubsidized student loans borrowers do not have to demonstrate financial need. Thus, they can take out more student loans which is why unsubsidized student loans are more common to graduate school borrowers.

Which is better, subsidized or unsubsidized loans?

In almost every scenario, subsidized student loans are the best option for student loan borrowers.

For starters, subsidized student loans do not accrue interest while borrowers are in school (And most likely not earning an income) and for 6 months after graduating.

In other words, if a student loan borrower has student loans that are subsidized, they won't have to worry about interest or making a student loan payment for that matter, until 6 months after they are done with school.

On the other hand, unsubsidized student loans start accruing interest the minute a loan is disbursed to the borrower.

For example: Johnny takes out an unsubsidized student loan the first semester of his freshmen year in college, that loan will begin to accrue interest. If Johnny doesn't make payments while in college, that loan will accrue interest from that moment until he graduates and starts working.

Here is a quick comparison of the pros and cons of subsidized versus unsubsidized student loans:

Subsidized Student LoansUnsubsidized Student Loans
– Doesn't accrue interest during school
– 6 month grace period
– Saves the most money over time
– A way to get lending for graduate school
– Does not require “Financial need”
– Higher annual lending limits
– Not available for graduate students
– Loan limits
– Accrues interest from the start
– Interest costs are more overtime

How interest works for Subsidized Loans

Understanding how interest works for subsidized student loans is simple:

Loans will not accrues interest until 6 months after a borrower completes or ends schooling.

Often referred to as direct subsidized loans, borrowers who demonstrate a financial need and qualify, are not responsible for the interest accrued during schooling. The federal government covers the interest.

Student loans do accrue interest, it is just a matter of whether the borrower covers the interest or the federal government.

Subsidized Loans 101:

  • Government covers interest as long as student is enrolled in school (at least half status)
  • Student loans do not grow
  • During deferment or forbearance student loan borrowers don't accrue interest
  • Borrowers have 6 months after no longer enrolling in school before they have to pay interest on their student loans

How interest works for Unsubsidized Loans

Understanding how interest works for unsubsidized student loans is equally as straightforward:

The minute a loan is disbursed, the borrower is responsible for the accrued interest.

In other words, Uncle Sam isn't helping you out on this one.

This is why graduate student loans are subsidized – students don't demonstrate financial hardship (They already got one degree in the eyes of the federal government).

The problem with unsubsidized student loans is that a $20,000 loan could end up being $26,000 or more before a borrower can even start to make payments.

Unsubsidized Loans 101:

  • Unsubsidized loans have $31,000 lending limits
  • Interest accrues at the disbursement of the loan
  • Do not have to demonstrate “Financial need”
  • End up costing more than subsidized loans

Should you avoid unsubsidized loans?

If possible, avoiding unsubsidized student loans is your best bet.

When potential student loan borrowers fill out their FASFA forms, they are essentially demonstrating their level of financial need. Based on metrics for student loan lending, if a potential borrower doesn't demonstrate enough need, they may not qualify for subsidized loans.

In some cases, potential loan borrowers may be awarded a combination of both subsidized and unsubsidized student loans.

Either way, if a borrower has to use unsubsidized student loans, it is best to follow this rule of thumb:

Best Practice – It’s best to borrow no more than you expect to earn in your first year out of college.

So if you plan on becoming a teacher with a starting salary of $55,000, make sure you don't take out more then $55,000 during your time in college!

5 Ways to Help You Get Ahead of Unsubsidized Loans.

If you're at a point where it is too late to say no to unsubsidized loans or you already took them out and graduated, you have several options.

Depending on where you are in life you can do one of several things:

  1. Refinance your student loans (Requires income)
  2. Start paying towards your student loans early
  3. Use other student loans to pay student loans
  4. Make money part-time in college to cover the interest
  5. Talk to your parents about covering the interest

1. Refinancing Unsubsidized Student Loans

In order to refinance student loans, in most scenarios, private lenders will require an income source before agreeing to refinance.

This option is most applicable for graduates with a job. Always be sure to weigh the pros and cons of shifting federally funded loans to private.

If the loans have already gained interest, it may be worth staying with the federal perks. Going back to grad school is a good reason to consider refinancing since unsubsidized student loans still collect interest even if you're in school.

2. Start Paying Early

Just like how the interest starts to accrue the minute an unsubsidized loan is disbursed, start paying for the student loan.

There is no rule as to when you can start paying a student loan. Typically most wait until after college. However, if you can figure out a way to at least cover the interest while you're still in school, at least you won't graduate with a larger balance.

Learn about how student loans work in this eBook:

3. Use other student loans to pay student loans.

This might sound contradictory, but in some cases, you can actually use student loan funds to pay other student loans.

For example, if you get a subsidized student loan and the amount is more than you need, simply take the extra amount and use it to pay for an unsubsidized student loan.

Common Practice for Grad School: Sometimes students in grad school have to take out additional student loans that can be unsubsidized. It's not a bad idea to take out some additional subsidized loans to pay back existing undergrad unsubsidized loans.

4. Make money part time in school!

Making money part-time in school has never been easier. With WFH (Work from home) options like ridesharing, delivery services, dog walking, and freelancing – there has never been a better time to make money in college.

Traditional means such as bartending, bouncing and working in the school library are still a great option too.

Either way, make sure to focus on finding these qualities in your part-time job:

Figure out how much interest your unsubsidized loan is accruing and set that as a barebone minimum goal to make. You might quickly find out that you need to rideshare for 3 hours a month in order to cover your student loan payment interest!

5. Ask your parents about the loans.

Unsubsidized student loans are awarded when a borrower doesn’t demonstrate financial hardship.

This doesn’t mean your parents are super-wealthy, but it might be worth just asking them to help you with the interest.

Depending on how much your student loans are, ask your parents for an advance or to cover just the interest on your unsubsidized student loans while you finish school.

Final Take:

It all adds up in the end.

At the end of the day the biggest recommendation anyone can say about student loans is just to pay them off ASAP.

The recurring problem with student loans is the fact that every situation is unique. To summarize the difference between subsidized and unsubsidized student loans realize that in the end you will accrue interest.

Whether or not that interest starts when the loans are issued (Unsubsidized) or six months after no longer being enrolled in school (Subsidized) is the big question.

If possible – avoid unsubsidized loans, or at the very least have a plan ahead of time!

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