Starting college is an exciting time, but it can also be nerve-wracking if you’re trying to figure out how to pay for it. Tuition has been on the rise and you might be looking at taking out a loan to pay for college.
If you’re looking into taking out a loan for your education, you probably have come across subsidized and unsubsidized loans. Do you know the difference?
Both subsidized and unsubsidized loans are offered through the federal government. However, with subsidized loans, the interest is paid for you while you’re in school, during a grace period following your graduation, and later if you need to defer your loan. With unsubsidized loans, you’ll be responsible for paying the interest as soon as the money is disbursed.
For more information on subsidized and unsubsidized loans, continue reading.
Understanding Subsidized Loans
These federal loans are a great option for students because you won’t be responsible for paying interest during the time you are in school, and during a grace period after you graduate. If you need a loan deferment, you also won’t have to worry about interest then, either.
During these three periods, the government or the bank will be paying the interest for you. However, once your repayment period begins, you’ll take over the interest payments as well. You begin repaying the original amount of the loan in addition to the interest that begins accruing from the moment repayment begins.
These loans are only available to undergraduate students who are at least part-time students. These loans have lower loan limits than unsubsidized loans and in order to receive them, you also must show that you have a financial need.
There are loan limits when it comes to borrowing with subsidized loans. Currently, you can borrow a maximum of $23,000 to pay for your undergraduate education. The maximum amount per year depends on your dependency status and what year you’re at in school. If you’re a dependent student, you’ll have to provide information about your parents on your FAFSA.
What Are Unsubsidized Loans?
Unsubsidized loans are also federal loans, but they don’t require that you show financial need.
Don’t worry if you aren’t an undergrad, because while they’re available for undergraduates, these loans are also available for graduate students and professional degree students.
You’ll also have a higher loan limit when it comes to borrowing, as the limit for an independent undergraduate student is $57,500 ($138,500 for graduate students). Like with subsidized loans, undergraduate unsubsidized loan maximums per year will depend on what year you’re in at school and your dependency status.
Now the downside of these loans is that you’ll be responsible for the interest from the date the loan is disbursed, which means you don’t get any help paying that interest. It’s all on you - and you could end up paying thousands of dollars on top of your loan.
The interest rate will be the same for undergraduate loans whether the loan is subsidized or unsubsidized; the major difference is how that interest accrues. Interest for unsubsidized loans begins accruing while you’re still in college. Interest rates for unsubsidized loans for graduate or professional degrees are slightly higher.
How Do You Qualify For Subsidized Loans Or Unsubsidized Loans?
To take out either of these loans, the first step is filling out the FAFSA. The FAFSA, or Free Application for Federal Student Aid, is a form that’s used by the federal government, states, colleges and other organizations to determine and award financial aid. The form will grant you access to not just these federal student loans we have been talking about, but also to scholarships, grants, and work-study programs.
Once you fill out that form, you’ll receive a report telling you how much financial aid you can receive. The financial aid office at the college or university you plan on attending will be able to assist you with any questions you might have.
Federal Loans Vs. Private Loans
Federal loans aren’t your only option, but they’re probably going to give you the best interest rates, repayment and forbearance options. Forbearance, or deferment, is a period where you’re allowed to stop making your loan payments temporarily. Depending on your situation, you might also be able to reduce the dollar amount of your payments temporarily.
Private loans are available for students but should be really only considered once you have exhausted all of your federal loan options. In addition to higher interest rates, you’re likely to need a co-signer for these loans.
Paying for college can be a difficult task, but subsidized and unsubsidized federal student loans can be your best option. Again, subsidized loans are appealing because of the interest being paid for you during certain times, but unsubsidized loans have their benefits as well. They aren’t solely designed for undergrads and you’ll have higher borrowing limits all while benefiting from low interest rates. Regardless of which type of loans you take out, the first and most important step is filling out your FAFSA.