To understand what the differences are between a subsidized vs unsubsidized loan, it important to know what the word subsidized or subsidy means. According to Webster dictionary, a subsidy is a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. How this translates to student loans is that generally speaking, subsidized loans are in some portion paid by the government, and unsubsidized loans are not.
What is a Subsidized Student Loan?
A subsidized federal student loan is a loan where the US Government helps subsidize or pay for a portion of the loan. For federal student loans, this equates to the government paying part of the interest on the loan. This subsidy of interest does not last throughout the full term of the loan, but is provided under the following circumstances;
- While the borrower is still attending school for at least half-time enrollment
- For the first six months after graduating or leaving school
- During deferment periods
*for direct subsidized loans obtained between July 1st, 2013 and July 1, 2014 there is no interest subsidy during your grace period.
Subsidized student loans are available only to undergraduate students who are able to display a financial need. The school which you are attending determines the amount you are able to borrow, and that amount cannot exceed your financial needs. To apply for a subsidized loan, you would need to complete a FAFSA form, and your school will then determine eligibility. If you are obtaining federal student loans to attend school, it is best to always take subsidized loans first up until you’ve borrowed the amount needed and permitted prior to taking out any unsubsidized loans. The amount of interest that the government will pay over the course of the loan can amount to many thousands of dollars.
Subsidized Maximum Eligibility Period
The period in which you may qualify for a subsidized loan is limited. Currently, eligibility is 150% of the time it would take to graduate in your program. This means that in a normal 4-year program, you would be eligible for subsidized loans for up to a maximum of 6 years. This is also subject to change if your school changes the program length for which you are studying. For 2-year associate degrees, the maximum eligibility period would be 3 years. If you receive a subsidized loan for a period of time which is shorter than a full academic year, your maximum eligibility period will be reduced accordingly. If you are enrolled less than full-time, that period would also be reduced accordingly.
If you have received subsidized loans for the maximum eligibility period, the interest on your loans will no longer be paid by the US Government, and you would become responsible.
Unsubsidized Loans
An unsubsidized federal student loan does not offer the same interest subsidy as found in subsidized loans. Unsubsidized loans are easier to obtain because they do not require that you demonstrate a financial need. Unlike subsidized loans, unsubsidized loans are available to both undergraduate and graduate students. Your school would determine the amount you can borrow, and you would be responsible for paying the interest on the loan at all times.
Unsubsidized Maximum Eligibility Period
Unsubsidized loans do not have a maximum eligibility period, unlike subsidized loans.
Subsidized vs Unsubsidized Maximum Borrowing Limits Per Year
The amounts you can borrow as a subsidized loan are limited. There are both annual limits, and aggregate limits. The student can borrow up to the annual limit each academic year, but cannot exceed the aggregate limit.
| Subsidized (dependent) | Unsubidized (dependent) | Subsidized (independent) | Unsubidized (independent) | |
|---|---|---|---|---|
| First Year | $3,500 | $5,500 | $3,500 | $9,500 |
| Second Year | $4,500 | $6,500 | $4,500 | $10,500 |
| Third Year & Beyond | $5,500 | $7,500 | $5,500 | $12,500 |
| Graduate & Professional | None | $20,500 | None | $20,500 |
| Sub & Unsub Aggregate Limits Undergrad | $23,000 | $31,000 (includes both sub and unsub) | $23,000 | $57,500(includes both sub and unsub) |
*for graduate and professional student, the aggregate limit is $138,500, of which no more than $65,000 can be subsidized.
Origination Fees for Subsidized vs Unsubsidized Loans
Both subsidized and unsubsidized student loans have an origination fee, which is an upfront fee charged for processing your loan application and for disbursement of the student loans. This origination fee would apply each time a new loan is taken out and is calculated as a percentage of the loan. Origination fees can change annually, here are the most recent.
| Loan from October 1st, 2016 – October 1, 2017 | 1.069% |
|---|---|
| Loan From October 1st, 2017 – October 1st, 2018 | 1.066% |
Qualifying For a Subsidized vs Unsubsidized Student Loan
To qualify for a subsidized or unsubsidized loan, you must be enrolled at a school as at least a half-time student, and that school must participate in the federal loan programs. You must also be enrolled in a program that leads to a degree. For subsidized loans, you must be an undergraduate and be able to display financial need. Graduate students can not qualify for subsidized loans. For unsubsidized loans, you do not need to show a financial hardship and can be either an undergraduate or graduate student.
Common Questions
Do you have to pay a subsidized loan back?
Yes. In a subsidized loan the government will pay part of the interest, but the borrower is still responsible to pay back the loan.
What is the difference between subsidized and unsubsidized student loans?
In a subsidized student loan, the government will pay part of the interest on the loan during certain periods. On an unsubsidized loan, the borrower is responsible for all interest on the loans.
Which is better subsidized or unsubsidized?
Subsidized loans are generally better because the US Government will pay some of the interest on the loan.
What is the interest rate on subsidized and unsubsidized student loans?
| Loan Type | 2017-18 Interest Rate | 2016-17 Interest Rate | 2015-16 Interest Rate |
|---|---|---|---|
| Direct Subsidized Loans (Undergraduate) | 0.0445 | 0.0376 | 0.0429 |
| Direct Unsubsidized Loans (Undergraduate) | 0.0445 | 0.0376 | 0.0429 |
| Direct Unsubsidized Loans (Graduate) | 0.0600 | 0.0531 | 0.0584 |
| Direct PLUS Loans (Graduate and Parents) | 0.0700 | 0.0631 | 0.0684 |
references:
https://www.merriam-webster.com/dictionary/subsidy
https://studentloans.gov/myDirectLoan/directSubsidizedLoanTimeLimitation.action
https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized
