College | February 16, 2022 | Kiley Thompson Show
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 a subsidized and unsubsidized student loan?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. 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 a federal 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. When you start paying back your unsubsidized loans, you’re paying on the original amount and the interest that accrued since the unsubsidized student 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 student loan, it will be part of your offer. On the “un” side, you do not have to demonstrate need for an unsubsidized student 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 keyIf 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. Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan. College can be expensive — but the good news
is that there are several funding sources that can help you cover your education costs, including both federal and private student loans. There are a few types of federal student loans available to college students: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. If you need to borrow for school, it’s usually best to start with subsidized loans before turning to Direct Unsubsidized Loans and other options. If you’re wondering how a federal Direct
Unsubsidized Loan works, here’s what you should know: Federal Direct Unsubsidized Loans are available to undergraduate, graduate, and graduate students regardless of financial need. This means that the majority of students can apply for them no matter what their financial situation is. Keep in mind: Unlike with undergraduate subsidized loans, you’re responsible for all of the interest that accrues on unsubsidized loans — including when you’re in school, during the grace period, and during any periods of deferment. Learn More: Subsidized vs. Unsubsidized Student Loans: Know the Difference Direct Subsidized Loans vs. Direct Unsubsidized Loans vs. Direct PLUS LoansThe right federal student loan for you will depend on your year in school and your financial need. If you’re an undergraduate student with financial need, it’s a good idea to rely on subsidized loans as much as possible before turning to unsubsidized loans and PLUS Loans. Here’s how these three main types of federal student loans work:
No matter what type of student loan you get, it’s important to consider how much that loan will cost you so you can prepare for any added expenses. For example, if you take out a Direct Unsubsidized Loan, you’ll need to take into account that you’ll pay more in interest. Find out how much you’ll owe over the life of your federal or private student loans using our student loan calculator below. Enter your loan information to calculate how much you could pay Loan amount ? Enter the total amount borrowed $ Interest rate ? Enter your annual interest rate % or Loan term ? Enter the amount of time you have to repay your loan years With a $ loan, you will pay $ monthly and a total of $ in interest over the life of your loan. You will pay a total of $ over the life of the loan, assuming you're making full payments while in school. Also see: What to Do if Your Parent Plus Loan is Denied How to qualify for an unsubsidized loanTo qualify for a Direct Unsubsidized Loan, you must:
Check Out: Federal Stafford Loans How to get an unsubsidized loan?If you want to take out an unsubsidized loan, follow these three steps: 1. Fill out the FAFSAIf you need to pay for college, your first step should be completing the Free Application for Federal Student Aid (FAFSA). Your school will use your FAFSA results to determine what federal student loans and other federal financial aid you qualify for. Tip: Be sure to submit the FAFSA before the deadline. For the 2022-2023 academic year, you have until June 30, 2023. Keep in mind that some financial aid is given on a first-come, first-served basis — so it’s a good idea to complete the FAFSA as early as possible, especially if you have high financial need. 2. Apply for scholarships and grantsUnlike student loans, college scholarships and grants don’t have to be repaid — which makes them a great way to pay for school. There’s no limit to how many scholarships and grants you can get, so it’s a good idea to apply for as many as you can. Some organizations that might offer scholarships and grants include:
You might also qualify for school-based scholarships, depending on your FAFSA results. Additionally, consider using websites like Fastweb and Scholarships.com to easily look for awards that you could be eligible for. 3. Take out federal student loansIf you need to borrow for school, it’s usually best to rely on federal student loans first. This is mainly because you’ll have access to federal student loan benefits — such as income-driven repayment (IDR) plans and student loan forgiveness programs. Once you complete the FAFSA, your school will send you a financial aid award letter detailing the federal student loans, federal financial aid, and school-based scholarships you qualify for. You can then choose which aid you’d like to accept. Here’s an example of how an award letter might look: Loan fees for Direct Subsidized and Unsubsidized LoansFederal student loans typically come with a disbursement fee. This is taken out of your loan amount when the funds are released to your school. For the 2021-2022 academic year, this fee is 1.057% for both Direct Subsidized and Unsubsidized Loans — somewhat less than the 1.059% disbursement fee for the 2019-2020 academic year. Learn More: Borrowing for College? Start with Subsidized Student Loans How much can you borrow with an unsubsidized loan?How much you can borrow with an unsubsidized loan depends on your year in school as well as if you’re a dependent or an independent student. Here are the student loan limits you can expect:
Check Out: Federal vs. Private Student Loans: 5 Differences Private student loans: When federal funding isn’t enoughIt’s possible that scholarships, grants, and federal student loans might not be enough to fully pay for your education. In this case, a private student loan could be a helpful option to cover any remaining expenses. But before you apply for a private student loan, it’s important to understand how they differ from federal student loans. Here are some of the key points to keep in mind as you weigh your options:
Tip: If you have poor or no credit and are struggling to get approved for a private student loan, consider applying with a creditworthy cosigner to improve your chances. Even if you don’t need a cosigner to qualify, having one could get you a lower interest rate than you’d get on your own. A cosigner can be anyone with good credit — such as a parent, another relative, or a trusted friend — who is willing to share responsibility for the loan. Just keep in mind that they’ll be on the hook if you can’t make your payments. If a private student loan seems like a good fit for your needs, be sure to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.
About the author Angela Brown Angela Brown is a student loan, personal finance, and real estate authority and a contributor to Credible. Her work has appeared in Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance. Read More What is the difference between a direct sub loan and a direct unsub loan?Direct Subsidized Loans are available only to undergraduate students who have financial need. Direct Unsubsidized Loans are available to both undergraduates and graduate or professional degree students. You are not required to show financial need to receive a Direct Unsubsidized Loan.
Is Sub or unsub loans better?When it comes to subsidized and unsubsidized loans, subsidized loans are the clear winner. If you can qualify for them, you'll pay less money in interest charges with a subsidized loan, and you'll save money over the life of your loan. But not everyone will qualify for a subsidized loan.
What does direct loan sub mean?A Direct Subsidized Loan is a type of federal student loans (made through the William D. Ford Federal Direct Loan Program) where a borrower isn't generally responsible for paying interest while in an in-school, grace*, or deferment period.
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