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The Difference Between Subsidized and Unsubsidized Loans


Posted on October 14, 2014 by Delaware Valley College.

Higher education is an important but expensive investment, which is why students should investigate loan options to put their degrees within reach. Researching the different types of loans can be complicated, especially Stafford loans, which are the most common government student loans and are awarded after students complete the Free Application for Federal Student Aid (FAFSA). Stafford loans are either subsidized or unsubsidized and this article will explain each of them.

 Subsidized Loans

Loans are considered subsidized when the U.S. Department of Education pays for the interest that’s deferred when students are in school or experiencing economic hardships. Examples include the subsidized Federal Stafford Loan and the Federal Perkins Loan. This needs-based loan has slightly better terms to help with financial need, and interest rates are lower than unsubsidized loans. FAFSAs determine students’ needs for financial aid. After completing the FAFSA, students receive a letter from their school informing them of how much they are eligible to borrow in Stafford loans.

Unsubsidized Loans

Loans are considered unsubsidized when the borrower must pay the interest, not the government. Examples include the unsubsidized Federal Stafford Loan and the Federal PLUS Loan. This loan isn’t based on a student’s financial need and therefore is available to most students and recipients of federal aid. Interest begins to accrue after the first disbursement. If the interest isn’t paid while the student is in school, it’s added onto the original loan amount once payments begin. The application process for unsubsidized loans is the same as for subsidized loans.

Other factors that differentiate these two types of loans include interest rates and loan limits. Each school determines how much aid students can receive, but there are limits regarding how much students can get each year and at the end of their undergraduate or graduate program. 

To be eligible for Stafford loans, students must be U.S. citizens, permanent residents, or eligible non-citizens and must be enrolled at least part-time in a degree-seeking program. Then the first step in the process is completing the FAFSA.

When applying to colleges and researching subsidized and unsubsidized, loans visit the financial aid page of the school's website or call the admissions office for more information. To find out which loans you are eligible for, fill out your FAFSA today.