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Unsubsidized loans vs. Subsidized loans: what’s the difference?

College • October 30, 2018 • Kiley Thompson

What you’ll learn

  • The pros and cons of unsubsidized and subsidized loans
  • What the "un" in unsubsidized means

There are many types of loans out there—and sometimes, you’re not sure what you’re eligible for until you receive financial aid offers from individual schools. Keep these definitions in mind from the beginning.

What’s the difference between unsubsidized and subsidized student loans?

The difference comes down to who is paying the interest that accrues on the loan from the moment you get the money. Both loans have the same interest rate, but whether or not you’re required to pay the interest during the time from disbursement to repayment is the important part.

That’s the “un” part. The “un” will determine the amount of money you’ll end up paying later.

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What is a subsidized loan?

A subsidized loan is a type of federal student loan. With a subsidized direct loan, the bank, or the government (for Federal Direct Subsidized Loans, also known as Subsidized Stafford Loans) is paying the interest for you while you’re in school (a minimum of half time), during your post-graduation grace period, and if you need a loan deferment.

You’re effectively getting your responsibility to pay that interest back “waived” with a subsidized loan during those time periods. Once you start repayment, the government stops paying on that interest, and your repayment amount includes the original amount of the loan, and the interest, accruing from that moment.

What is an unsubsidized loan?

Another type of federal loan is an unsubsidized loan. With an unsubsidized loan, you are responsible for the interest from the moment the loan money is disbursed into your account. There’s no help on the interest; you’re responsible for the whole amount.

So, when you start repaying, you’re paying on the original amount and the interest that accrued since the loan was paid to you. This can, of course, add up to thousands of dollars more to repay over the life of the loan.

So why would anyone ever take out an unsubsidized loan

Simply put, subsidized loan offers are based solely on need, when you apply for aid through the Free Application for Federal Student Aid (FAFSA), and they are only available to undergraduate students. Generally, you’ll find out how much you’re allowed to borrow on a subsidized loan, for a particular school, via your school’s financial aid offer. Colleges set those amounts individually. If you’re eligible for a subsidized loan, it will be part of your offer.

On the “un” side, you do not have to demonstrate need for an unsubsidized loan, so you can borrow more money, and use the funds to pay for a graduate degree, for example. This option will also be in your offer packet, but if you’re eligible for a subsidized loan, I recommend you take that option first.

The FAFSA is key

If you need to take out a loan to make ends meet, know that you’re not alone. College is expensive and no one expects you to have planned for all contingencies. Just be sure to file the FAFSA—it’s the key to all federal financial aid, including college scholarships, college grants, and your eligibility for subsidized and unsubsidized student loans.

Kiley Thompson is a writer and editor for Smart College Visit. She has previously worked in alumni relations and undergraduate admissions.

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You must apply for a new loan each school year. This approval percentage is based on students with a Sallie Mae undergraduate loan in the 2017/18 school year who were approved when they returned in 2018/19. It does not include the denied applications of students who were ultimately approved in 2018/19.