Should You Get a Subsidized Student Loan?

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Posted on: 06/10/2020
Should You Get a Subsidized Student Loan?

The average cost of a four-year college education at a US university is $34,740 per year. Since millions of Americans can’t afford this sum out-of-pocket, the US Department of Education offers Federal Direct Loans to college students to offset the cost. These loans come in two forms: subsidized or unsubsidized. Which of the two options should you get? Is applying for a subsidized student loan a good choice? Find out below:

How Do Subsidized Student Loans Work?

Generally, when you take out a loan, you repay the principal along with whatever interest is charged on it. Every payment you make goes towards reducing your loan balance as well as paying off the interest. Furthermore, every time you miss a payment, the interest charges accrue and are added to your remaining balance, increasing your monthly payments in the future.

However, with a subsidized student loan, the government pays the interest charges during your school years. This means that interest doesn’t accrue on your balance while you’re enrolled in school, reducing how much you end up repaying when you graduate. Additionally, the government covers your interest payments during a 6-month grace period (the first six months that follow your graduation). As a result, your loan balance remains the same throughout your college years + six months afterward. After the grace period, you’ll be required to pay back the loan with interest.

Should you remain unemployed or fail to find a full-time job after graduation, you may apply for deferment. If granted, you can postpone repaying your loan for up to 3 years. During this time, the government will be responsible for your interest payments, thereby ensuring that your balance remains the same. To qualify, you need to be registered with an employment agency or be an unemployment benefit recipient. You’ll also need to reapply for deferment every six months.

The Benefits of Subsidized Student Loans

In addition to interest payment relief, there are some other benefits of taking out a subsidized student loan. Some of them are outlined below:

  1. If you’re going to take out a student loan, you might as well apply for a subsidized one. It assures that your loan doesn’t accrue interest until you find a well-paying job. If you get a subsidized loan of $20,000, your balance remains at 20k throughout your years of study and for six months after. All you have to do is be enrolled at half-time status at your school (i.e., carrying a 12-hour workload per week or earning a minimum of 6 credit hours per semester).

  2. Federal student loans, subsidized or not, come with lower interest rates than student loans from private lenders. Additionally, the rates remain fixed throughout the life of the loan. If you lock in a loan at very low rates, you get to enjoy the same rate for years and save thousands of dollars in interest payments. Private student loans often have variable rates, and payments may increase along the line.

  3. Subsidized student loans offer reprieve if you run into financial trouble after school. In addition to deferment, which allows you to suspend loan repayments for up to 3 years, you may also apply for income-driven repayment (IDR) plans. With IDR, your monthly payment is pegged to your income. You pay a percentage of your income to the lender, and if you have no income, you don’t make any payments. This arrangement isn’t available for unsubsidized student loans.

  4. Beneficiaries of subsidized student loans may also be eligible for loan forgiveness. Depending on the prevailing circumstances, your remaining balance may be forgiven entirely, or you may be granted forgiveness for up to $17,500 of your balance.

  5. You don’t need prime credit scores to qualify for subsidized student loans. Most federal student loans don’t even require a credit check. Private loans, on the other hand, require good credit scores and your score determines the interest rate you’re offered. This isn’t ideal for college students that have short or no credit histories.

The Disadvantages of Subsidized Student Loans

Subsidized student loans have some disadvantages; the biggest of them is that not everyone is eligible to apply. Find out more here:

  1. Subsidized student loans are only available to first-degree students that can demonstrate financial need. If you’re an undergraduate, you need to apply for student aid via FAFSA and prove that you can’t afford to fund your education. Graduate students aren’t eligible for subsidized student loans, even if they can demonstrate financial need.

  2. The principal available to subsidized student loan beneficiaries is limited. As a dependent undergraduate, the total amount you can borrow is capped at $23,000. In your first year, you’re only eligible to receive $3,500 or less. As a result, most beneficiaries need to take out other loans to afford college costs.

  3. The loan is only subsidized during your school years and the grace period. Once you get a full-time job, your student loan becomes unsubsidized, and you have to repay principal + interest. It becomes a standard loan for the remaining years, and federal loans are usually long-term (with repayment duration between 10 to 30 years).

Bottom Line

Should you get a subsidized student loan? If you’re eligible and you have made up your mind to get a college education, it may be your best. Since your financial capacity is limited, you can’t afford college without a loan. If you’re going to take out a loan, then one that suspends interest charges for 4+ years is a great deal. If you factor in the low and fixed interest rate, it becomes a no-brainer.

Yes, you’re limited to a maximum of $23,000, and you may need to take out other loans to make up the difference. However, if you get the subsidized loan, you would have already shaved off part of the total amount you need. The grace period and deferment also give you some wiggle room. You don’t have to settle for low-paying jobs because you’re desperate to avoid accruing interest on student loans. Instead, you can take your time and get a well-paying job, making repayment even easier.

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Finance Guru