Subsidized vs. Unsubsidized Student Loans: What’s The Difference?

Man carrying books with Subsidized vs. Unsubsidized Student Loans for College

How to decide between subsidized vs. unsubsidized student loans isn’t always as clear as it could be. Finishing high school and looking ahead to the world of college is one of the most exciting times in anyone’s life. For the first time in our lives, many of us have the freedom to start making decisions for ourselves.

We need to figure out our academic and career goals and also how to achieve them. We can get intimidated by the depth of our choices. College isn’t cheap and finding a way to pay for it can be harsh indeed.

The subsidized vs. unsubsidized student loans difference can be a snooze-fest, confusing the best of us. The information superhighway can be a bog and be challenging to slog through. It is also a necessary piece of financial knowledge that will help decrease your ending balance on student loan debt.

Subsidized vs. Unsubsidized Student Loans: What Are They?

Student Loan Officer Explaining the Difference Between Subsidized vs. Unsubsidized Student Loans
Image: Public Domain US, Dawn Arlotta, via Wikimedia Commons

For us to understand what the differences between subsidized vs. unsubsidized student loans, we have to know a little bit about borrowing in general first. Any loan involves acquiring a certain amount of money from someone. It doesn’t matter if it is a subsidized or unsubsidized college loan, home loan, car loan, or any other type of loan. For both subsidized vs. unsubsidized student loans, and other loan types, that source can be the federal government.

The amount of money you borrow is called the principal. When you borrow that money, you agree to pay back the principal in a certain amount of time. You will also pay back a little something extra called interest. The amount of interest assessed is a percentage of the amount borrowed. The interest is what entices a lender to make the loan to you. It is a guarantee that their time and effort in processing your loan will pay off for them.

There are three significant differences between subsidized and unsubsidized loans. Unsubsidized loans work like any other kind of loan. The principal is the amount that you borrow, and then the principal and the interest must be paid back. In the case of some subsidized and unsubsidized student loans, money may be available from the federal government. These are known as Stafford Loans or Direct Stafford Loans.

Subsidized loans work differently because while you still need to pay back the amount of money you borrowed, the federal government subsidizes (a word which here essentially means “pays for”) your interest. In other words, with a subsidized loan, you don’t need to pay for the interest at all. Sounds pretty impressive, right?

What’s the Catch?

College Student Overwhelmed for Student Loan Balance Due
Image: CC by A-SA 2.0, CollegeDegrees360, via Flickr

A wise person once said, “There’s no such thing as a free lunch.” If there’s no such thing as a free lunch, there’s no such thing as a free loan. We’d love to be able to say that an infinite amount of interest-free subsidized loan money is available to everyone, that’s not the case. The federal government is limited in the amount of funding budgeted for this purpose. When educational funding cuts made by Congress filter down, the amount available for loans invariably decreases.

The second significant difference between subsidized loans and unsubsidized loans involves financial need. Subsidized loans are only available to those who qualify based on personal financial need. The federal government offers subsidized loans to help those who would not otherwise be able to afford to go to college.

Examples of such students might include the children of single parents or applicants who have no family members that have attended college. These students are the first in their family to go to college. The federal government wants to offer the chance to succeed at the best college available to these students. Part of the plan to assist these students is to provide them with affordable, interest-free student loans.

Limitations on federal government loan programs

Discussions on the Limitations on federal government loan programs
Image: Public Domain US, Consumer Financial Protection Bureau, via Flickr

Likewise, the third difference between unsubsidized and subsidized students loans becomes vital. Subsidized loans apply to initial degree programs. Students cannot use subsidized loans for graduate school degrees or other forms of post-grad education. So, graduate schools such as business school or law school result to non-eligibility for any subsidized loan program. Advanced degrees require the use of unsubsidized loans Often supported by some exchange of collateral as a guarantee of repayment.

Subsidized loan programs help students who could not otherwise afford to attend college. Any degree beyond undergraduate considers being too far outside the intent of what should be covered by the federal government. Therefore, if you’re looking into obtaining a college loan from the federal government to go to medical school, you won’t be able to get a subsidized loan.

How to Tell if you Qualify for Subsidized vs. Unsubsidized Student Loans

Students Qualified for Subsidized vs. Unsubsidized Student Loans
Image: CC by 2.0, J Stimp, via Flickr

The best way to tell if you qualify for a college loan of any kind is to check out the federal government’s website on college lending qualifications. Generally speaking, when you have a question about a federal program, the best place to look is that program’s website. When it comes to subsidized vs. unsubsidized student loans, the best resource is going to be the college itself.

The federal government asks each college to determine what the financial need of any given application is. One of your best resources in determining what financial aid you qualify for is the college’s financial aid office. The job of a college financial aid adviser is to help students find the financial means to attend college. They will be able to counsel you on how much money you can or should borrow. Aid advisers are an excellent resource to help you find out exactly how you can attend college.

If the financial aid office determines that you don’t qualify for aid, don’t give up hope. There are other steps you can take. You can call and ask for an in-depth re-evaluation. Very commonly, financial aid advisers are happy to help individuals find a plan that works for them and their family. Perhaps your application didn’t make your particular circumstances as transparent as possible to the adviser who evaluated it. They can also assist you in finding alternative forms of financial aid.

How Much Of Each Loan Type Should You Borrow?

Getting to Know How Much Of Each Loan Type Should You Borrow
Image: CC by 2.0,, via Flickr

Ultimately, the best person to ask this question of is your financial aid adviser.

It may be that your circumstances rule out the possibility of a subsidized loan. That may be because you don’t have enough of a financial need. Perhaps the program you’re trying to get into is a graduate or post-graduate program. Many reasons arrive when a subsidized loan may not be approved.

If you must rely solely on unsubsidized federal loans, treat them as you would any other loan. Compare the interest rate to those available via other lenders such as your bank or credit union. Make the choice that is right for you and your family.

If you do qualify for subsidized loans, however, it is to your benefit to make as much of your total student debt as possible in the form of subsidized loans. Interest rates might seem like small numbers, but when applied to a large principal over time they can multiply. With subsidized loans, this isn’t a problem because the federal government covers your interest for the duration of the loan. You only have to worry about paying back the principal amount you originally borrowed.

Other Financial Aid Grant and Student Loan Programs

Discretionary Income After Paying Taxes
Image: CC 0 by Public Domain, geralt, via Pixabay

Many people that might not qualify for subsidized student loans may be eligible for Pell Grants. Unlike a loan, a grant does not require repayment. The amount awarded under the Pell Grant determines the financial need. The Pell Grant is available to some students in graduate and post-graduate programs. The primary purpose though is to assist those completing their Bachelor degree.

Many colleges and universities offer an in-house scholarship, loan, or grant program. For information on what is available at the school of your choice check with the financial aid office.

Private awards, scholarships, grants, and donations are available through outside foundations and company programs. The organization and their award guidelines would determine your eligibility. Some contests begin as early as middle school, allowing younger students to earn merit scholarships. Research and perseverance will uncover a plethora of opportunities that will assist you in keeping your loan debt lower.

Hopefully, all of these facts have made the murky world of federal college loans and other funding avenues much more clear. Either way, we wish you success on your college journey—and congratulations on making it this far.

Featured Image: CC 0 by Public Domain, 0theFool, via Pixabay


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