Funding Solutions

The Pros and Cons of Subsidized and Unsubsidized Student Loans

Student loans

These days, given the massive increases in tuition at major universities and the cuts in many types of financial aid, an increasing number of students every year need help from either federal or private student loans as a way to fund their college educations.

A lot of people have outstanding student loan debt. According to the 2018 statistics, more than 45 million borrowers carried an average student loan balance of more than $37,000, with the total amount of debt topping $1.5 trillion.

What Types of Student Loans are Available?

When someone takes out a federal student loan to pay for their school tuition, their books, and/or their living expenses, the loans fall into one of two categories, including:

  • Direct Subsidized Loans
  • Direct UnSubsidized Loans

There are significant differences between subsidized and unsubsidized student loans, so you should look at all the pros and cons of both before deciding which one is best for you. That requires looking at the positives and negatives of each.

Specifics of a Direct Subsidized Loan

A Direct Subsidized Loan is a loan in which the federal government will pay the interest on the loan while the student is in school at least half-time. While you are studying, the federal government “subsidizes” you by paying off your interest, which begins to accrue immediately after you receive the loan proceeds.

How Do Subsidized Loans Work

In other words, if you take out a $10,000 Direct Subsidized Loan as a freshman, when you graduate four years later, the balance of the loan will remain $10,000 for you, since the government has been paying your interest during those four years.

According to the U.S. Department of Education, Direct Subsidized Loans have been designed for lower-income undergraduates. The school itself determines the amount of Direct Subsidized Loans you are eligible to receive, and the amount of the Direct Subsidized loan cannot exceed the borrower’s determined financial need.

The Pros of Direct Subsidized Loans are:

  • The U.S. government pays the interest on your loan as long as you remain enrolled at least half-time or more
  • The federal government will continue to pay interest for six months after graduation, or whenever the eligible loan is in deferment and forbearance, as well as for certain repayment plans that are subject to a specific set of rules
  • Students are not required to make payments until six months after graduation.

The Cons of Direct Subsidized Loans are:

  • Subsidized loans are only available to undergraduate students; graduate students don’t qualify.
  • Students whose parents make “too much money” and are unable to demonstrate financial need don’t qualify.
  • Annual loan limits are lower and have been capped at $23,000.

Specifics of Direct Unsubsidized Loans

Though unsubsidized student loans are also offered by the Federal Government, they are more like a conventional loan, without the additional financial assistance of paying the interest while you are still in school.

How Do Unsubsidized Loans Work

While you are still in school, you are responsible for interest payments. If you do not pay the interest, it will simply be added onto the principal, which means, over four years, a $10,000 loan could grow to $12,000 or more by the time you graduate.

The reason the government does not subsidize these loans is because they are general loans that are not need-based. Borrowers are required to pay the full amount of the debt, including accruing interest.

The Pros of Direct Unsubsidized Loans:

  • Direct Unsubsidized Loans are available to both undergraduate and graduate students
  • Applicants are not required to prove financial hardship to qualify
  • Annual loan limits are higher, with a cap of $31,000.

The Cons of Direct Unsubsidized Loans:

  • Borrowers are responsible for paying every dollar of interest on their unsubsidized loans, even while they are still in school
  • There is no six-month grace period following graduation and interest is accrued during deferments or forbearances. (Note: if you don’t pay interest on an ongoing basis, the interest will be added without additional penalties, until you are required to make payments under the agreement).

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