Subsidized or unsubsidized student loans


The rising cost of a college degree means that more students than ever are borrowing to cover their expenses. While some students opt for loans from private lenders, as of March 2021, around 42.9 million borrowers had federal direct loans.

Subsidized vs unsubsidized

Federal direct loans can be subsidized or unsubsidized. Both types offer many benefits including flexible repayment options, low interest rates, the ability to consolidate loans, and forbearance and deferral programs.

So how do subsidized and unsubsidized loans compare? Read on.

Key points to remember

  • Federal student loans can be subsidized or unsubsidized.
  • A student’s eligibility for subsidized loans is based on their financial need.
  • Both types of loans must be repaid with interest, but the government makes a portion of the interest payments on subsidized loans.
  • Due to the pandemic, the US Department of Education has offered students a final extension of the student loan payment break until January 31, 2022.
  • Loan limits are different for undergraduates and graduate students.

Who is eligible for Federal Direct Loans?

For federal subsidized and unsubsidized loans, borrowers must meet the following requirements:

  • At least part-time enrollment in a school participating in the federal direct loan program.
  • A U.S. citizen or an eligible non-citizen.
  • Have a valid social security number.
  • Satisfactory academic progress.
  • Have a high school diploma or equivalent.
  • No defaults on existing federal loans.
  • Registration with the selective service system (for men aged 18 to 25).

Direct subsidized loans are only available to undergraduates who have a demonstrated financial need. Undergraduates and graduate students can apply for direct unsubsidized loans, and there is no financial need requirement.

If you qualify for a subsidized loan, the government will pay the interest on your loan while you are in school at least part-time and continue to pay it for a six-month grace period after you leave school. The government will also repay your loan for a suspended period.

To apply for either type of loan, you will need to complete the Free Application for Federal Student Assistance (FAFSA). This form asks for information about your income and assets and those of your parents. Your school uses your FAFSA to determine what types of loans you are eligible for and how much you can borrow.

Note that interest on student loans from federal agencies was suspended during the coronavirus crisis by former President Trump on March 13, 2020, and the forbearance on student loans held by the federal government was extended until January 31. 2022. As of March 30, 2021, this also includes all Federal Family Education Loan Program (FFEL) loans.

How much can you borrow?

The federal direct loan program has maximum limits for the amount you can borrow each year through a subsidized or unsubsidized loan. There is also a global borrowing limit.

Undergraduate students

First-year undergraduates can borrow a combined amount of $ 5,500 in subsidized and unsubsidized loans if they are still financially dependent on their parents. Of this amount, only $ 3,500 can be subsidized loans. Independent students and dependent students whose parents do not qualify for Direct PLUS loans can borrow up to $ 9,500 for their first year of undergraduate study. Again, the subsidized loans are limited to $ 3,500 of this amount.

The borrowing limit increases for each subsequent registration year. The overall total limit for subsidized loans is $ 23,000 for student dependents, and an additional $ 8,000 is allowed in unsubsidized loans. For independent students, the overall limit is raised to $ 57,500, with the same limit of $ 23,000 on subsidized loans.

Graduate students

Including their undergraduate loans, graduate and professional students have an aggregate limit of $ 138,500 in direct loans, of which $ 65,500 can be subsidized. As of 2012, however, graduate and professional students are only eligible for unsubsidized loans.

First-time borrowers

If you are a first borrower after July 1, 2013, there is a limit on the number of academic years you can receive direct subsidized loans. The maximum eligibility period is 150% of the published duration of your program. In other words, if you enroll in a four-year degree program, the maximum length of time you could receive direct subsidized loans is six years. No such limit applies to direct unsubsidized loans.

Interest on subsidized and non-subsidized loans

Federal loans are known to have some of the lowest interest rates available, especially compared to private lenders who can charge borrowers a double-digit APR. Loans disbursed as of July 1, 2021 and before the school year of July 1, 2022, both subsidized and unsubsidized direct loans carry an APR of 3.73% for undergraduates.

The APR on unsubsidized loans for graduate and professional students is 5.28%. And unlike some private student loans, these rates are fixed, meaning they don’t change over the life of the loan.

Another thing to note about interest: while the federal government pays interest on direct subsidized loans for the first six months after you leave school and during deferral periods, you are responsible for interest if you defer. an unsubsidized loan or if you put one or the other type of loan in forbearance.

Income-based repayment plans can mean lower monthly payments, but you could still make them in 25 years.

Repayment of subsidized and unsubsidized loans

When it is time to start paying off your loans, you will have several options. Unless you ask your lender for a different option, you will automatically be enrolled in the standard repayment plan. This plan sets your repayment term for up to 10 years, with equal payments each month.

Progressive repayment plan

The graduated repayment plan, by comparison, starts your payments lower and then increases them gradually. This plan also has a term of up to 10 years, but you’ll pay more than with the Standard option due to the way the payments are structured. There are also several income-driven repayment plans for students who need flexibility in how much they pay each month.

Income-based reimbursement

Income Based Repayment (IBR), for example, fixes your payments at 10-15% of your monthly discretionary income and allows you to extend the repayment over 20 or 25 years. The advantage of income oriented plans is that they can lower your monthly payment. But there’s a catch: the longer it takes you to repay the loans, the more total interest you’ll pay. And if your plan allows you to write off part of your loan balance, you may need to report it as taxable income.

The advantage is that the interest paid on student loans is tax deductible. Starting in 2021, you can deduct up to $ 2,500 in interest paid on a qualifying student loan, and you don’t have to itemize to get this deduction.

Deductions reduce your taxable income for the year, which may lower your tax bill or increase your refund amount. If you paid $ 600 or more in student loan interest for the year, you will receive Form 1098-E from your loan officer to use for tax reporting.

Advantages
  • The government pays interest accrued on subsidized loans while a borrower is in school and during the six-month grace period of the loan.

  • Subsidized loans have lower interest rates than non-subsidized loans.

  • Unsubsidized loans can be used for higher education.

  • Borrowers do not have to justify a financial need to take out an unsubsidized loan.

The inconvenients
  • Soft loans can only be used for undergraduate studies.

  • You must qualify by demonstrating a financial need to take out a subsidized loan.

  • The government pays no accrued interest on an unsubsidized loan.

  • Unsubsidized loans have a higher interest rate than subsidized loans.

Subsidized and Unsubsidized Student Loans FAQs

What is the difference between subsidized and unsubsidized direct federal loans?

Both types of loans are offered by the federal government and must be repaid with interest. However, the government will make part of the interest payments on the subsidized loans.

Are Unsubsidized Loans Bad?

Unsubsidized loans have many advantages. These loans, unlike subsidized loans, can be used for undergraduate and graduate studies, and students do not need to demonstrate financial need to qualify. Interest starts accruing as soon as you take out the loan, but you don’t have to repay the loans until you graduate, and there is no credit check when you apply, unlike private loans.

Are Subsidized Loans Better Than Unsubsidized Loans?

Subsidized loans offer many benefits if you qualify for them. While these loans are not “better” than unsubsidized loans, they offer borrowers a lower interest rate than unsubsidized loans. The government pays the interest on them while a student is in school and during the six-month grace period after graduation. However, subsidized loans are only available for students who demonstrate financial need and you can use them for undergraduate study.

How to repay subsidized loans?

You can repay your subsidized loan at any time. Yet most students begin to repay their loans after graduation, and loan payment is required six months after graduation, known as the “grace period” during which the government continues. to pay interest owed on loans.

When your loan enters its repayment phase, your loan manager will put you on the standard repayment plan, but you can request a different payment plan at any time. Borrowers can make their loan payments online through their loan officer’s website in most cases.

The bottom line

Both subsidized and unsubsidized direct loans can help pay for college education. Remember that one or the other type of loan eventually has to be repaid and with interest. So think carefully about how much you’ll need to borrow and which repayment option is best suited to your budget.

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