Subsidized VS. Unsubsidized Loans

Subsidized VS. Unsubsidized Loans

The achievement of big dreams about your future starts with education. What if you can't pay for your tuition? Rest assured, the Federal Direct Loan Program might be the answer. As there are two kinds of loans: subsidized and unsubsidized, the students should compare both considering all their pros and cons, to understand which can help them achieve their college dreams.  

What Are Subsidized Loans?

Subsidized loans are for undergraduate students facing difficulties in paying for their tuition. These loans come with small fees that are deducted from the payouts. The interest rates for this student loan range from 4-to 5%. There are certain limits on borrowing subsidized direct loans, and your financial needs usually determine the available amount during a school year. U.S. Department of Education sets the following limits:

  • First-year undergraduate: $3,500
  • Second-year undergraduate: $4,500
  • Third-year undergraduate and beyond: $4,500  

What Are the Eligibility Requirements to Qualify for a Subsidized Loan?

To qualify for subsidized loans, the government has set a few requirements that you should meet. Thus, the subsidized loans are for those students in need of financial assistance who:

  • Are at least first-year undergraduate: You must be enrolled at least half-time in an undergraduate program (in a recognized college or university) leading to a degree or certification. Graduates, on the other hand, are ineligible for subsidized student loans.
  • Have a U.S. citizenship or permanent residency.
  • Have a good credit history: You should not have previous credit defaults and owe a refund.   
  • Have a high academic standing: High academic place is especially important to qualify for a subsidized loan as you must demonstrate your capacity to repay by your academic success.
  • Provide proof of financial need: This includes verifying your and your family's income and evidence that the loan payback amount surpasses your repayment capabilities. The amount you get may be limited based on the cost of the college to which you apply.

The Processing of Subsidized Loans

The process of requesting such student loans is simple, and all you need is to fill out the FASFA (Free Application for Federal Student Aid) form online. However, be aware that there might be deadlines for submitting FASFA applications for each academic year in many states.

After submitting the loan request form, you have to wait for feedback in the form of an award letter. The latter will include information on whether you qualify for the loan or not and will outline the exact amount you will be eligible to get. 

Finally, the students must sign a document to agree to the loan's terms. First-time borrowers will also be required to attend online student loan counseling, which will clarify their financial commitments.

Once the documents are signed, the money will be transferred into your school account to cover your tuition, boarding, and other education-related expenses. 

The Advantages and Disadvantages of Subsidized Loans

Subsidized vs. Unsubsidized Loans

When speaking about the pros and cons of subsidized loans, let's start with two main benefits:

Saving money: During your studies and up to six months after you graduate, the U.S. government pays interest on your loan.

Flexible repayment options: Repayment flexibility makes it easier for graduates to clear their debt. If you miss a payment beyond the 6-month mark, the interest owing will not be credited to your principal account; therefore, the overall cost of the loan will stay the same. During these six months, you can figure out your repayment plan.

Though subsidized loans can come in handy, they also have some disadvantages that undergraduates should consider. 

Borrowing limitations: The maximum amount you can borrow is determined by your college, federal limits, and your year at school. 

Availability to undergraduates: The graduates can't take avail of these borrowings, so the graduates have to look for something else. 

The high eligibility requirements: To qualify for these loans, your parents' income status should be insufficient to cover your education expenses. 

What Are Unsubsidized Loans?

Unsubsidized loans are available to graduate and undergraduate students without proof of their financial needs. Compared to subsidized loans, you are responsible for paying the interest for unsubsidized loans. There is no federal help in paying the interest for these loans. 

The Eligibility Requirements for Unsubsidized Loans

Unsubsidized student loans are available without financial status. However, since the borrowers pay the interest, even those who can't demonstrate proof of financial need can be eligible for the loan. The other requirements include:

  • Enrollment at least half-time as a student; however, there might be other private programs ready to assist the students even if they are enrolled less than half-time. 
  • Having a high school diploma or GED (General Education Development).
  • Being a U.S citizen or permanent resident. However, private lenders may also provide unsubsidized loans to international students who can bring a co-signer with U.S. citizenship. 

As in the case of subsidized loans, unsubsidized loan borrowers should also have an excellent academic standing and have good payment history in previous student loans. 

Subsidized vs. Unsubsidized Loans

The Pros and Cons Of Unsubsidized Loans

Unsubsidized loans have the following apparent benefits: 

The advantages of unsubsidized loans are:

  • Low-interest rates
  • Higher borrowing limits

The disadvantages of these loans include: 

  • The borrower is responsible for all interest
  • Graduate students pay higher interest rates

The Bottom Line 

Thus, whether you choose subsidized or unsubsidized loans is determined by your circumstances. You should weigh the benefits and drawbacks of both loan kinds before deciding. If you apply for subsidized loans and require more than the maximum amount, you can make up the difference with an unsubsidized or private student loan.

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