What is the difference between a subsidized and unsubsidized student loan?

When it comes to student loans, there are a number of different features and benefits. While most borrowers are familiar with factors such as interest rates and loan terms, there are other conditions and “jargon” that may be unfamiliar but nonetheless just as important. Therefore, having a good understanding of just exactly what the conditions are between you and your student loan lender will make for a much better experience for all who are involved.

Subsidized Versus Unsubsidized Loans

When referring to a student loan that is subsidized, it means that the U.S. government is actually paying the interest on the loan while the student borrower is still in school. This entails the student being enrolled in a qualified college or university.

One of the biggest advantages to having a subsidized student loan is that any interest that would have been added to the loan balance will essentially be erased by the government. And this can save borrowers hundreds if not thousands of dollars in potential loan interest charges.
Typically, student loans that are subsidized are reserved for those students that have more of an ongoing financial need, meaning that they may face financial hardship throughout the entire time they are attending college.

The most common types of loans that are subsidized are Perkins loans and Stafford loans. A Perkins loan is a need-based, primarily lower-interest loan that is offered directly to college students as versus to their parents even though the amount of such a loan will be determined by an expected amount of family contribution towards the student’s educational costs.

When a Perkins loan borrower graduates from college, they will be given a grace period of nine months during which loan interest still does not accrue. Perkins loans typically have a repayment period of ten years.

A Stafford loan is also granted to students and not to their parents, and similarly, the amount of such a loan is also determined from the expected amount of the student’s family’s contribution. The repayments on a Stafford loan are not required until the student borrower has graduated.

However, these types of loans may be either subsidized or unsubsidized. With a Stafford loan that is unsubsidized, the interest on the loan will accrue prior to the student borrower graduating from college. In fact, typically the interest on an unsubsidized loan will begin building up as soon as the funds are borrowed. In this case, it is possible that the balance to be repaid on an unsubsidized loan will be quite a bit more than on a similar amount on an subsidized loan.

Students who have not proven a substantial amount of financial need will oftentimes only be offered loans that are unsubsidized even though the student loans that they obtain may still have very attractive interest rates.

One way to keep the loan balance from building up substantially during the student borrower’s college years is to pay off the interest as it is added. While this may cause the student or their parents to make loan payments even prior to graduation, it will help in keeping the amount of the debt obligation that is owed upon graduation to a more manageable amount.

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