If you need student loans to pay for school, the first loan types you should consider are federal direct subsidized and unsubsidized loans. They’re typically the lowest-cost student loan option, and subsidized loans in particular have the most generous repayment plans, if you qualify.
Subsidized loans are available to undergraduates who demonstrate financial need through their Free Application for Federal Student Aid, or FAFSA. Unsubsidized loans are available to any undergraduate, graduate or professional student in school at least half-time. Here’s how they compare.
What Is a Subsidized Loan?
As the name implies, direct subsidized loans are a type of federal student loan that come with a subsidy for borrowers, making them one of the cheapest loan options available. The “direct” in their name comes from the William D. Ford Federal Direct Loan Program, the U.S. Department of Education initiative that makes these loans available. You may also see direct loans referred to by their old name, Stafford loans.
As soon as you take out a subsidized loan, interest starts accruing, but the government pays it on your behalf. As is true for most federal student loans, you are not required to make any payments—on interest or principal—while in school or for six months after leaving school. That means that on a subsidized loan, there will be no interest to add to the principal when those six months are up, so you’ll only repay the original amount you borrowed.
The government covers the interest on a subsidized loan during the following periods:
- While you’re in school at least half-time
- During your six-month grace period, which occurs after you graduate, leave school or start attending less than half-time
- During periods of deferment, a type of payment-postponement period you’re eligible for when you’re unemployed, are undergoing cancer treatment, meet income guidelines qualifying you for economic hardship and in certain other circumstances
Interest will accrue, however, during periods of forbearance, a different type of payment postponement. Also, due to a brief change in the congressional budget made in 2012, borrowers who took out direct subsidized loans between July 1, 2012 and July 1, 2014 must pay the interest that accrues during their grace period. Interest that doesn’t qualify for the government subsidy will be added to the principal amount.
What Is an Unsubsidized Loan?
Unlike subsidized loans, unsubsidized loans do not come with an interest subsidy. These loans accrue interest at all times, which the borrower must eventually pay. But, similar to subsidized loans, you don’t have to start paying off unsubsidized loans until after your grace period ends. At that time, interest that has accrued will be capitalized, or added to the principal balance you originally borrowed.
Unsubsidized loans are more widely available than subsidized loans. You don’t need to demonstrate financial need as a result of the information you provided on the FAFSA. You can also get them as a graduate or professional student.
Parents, however, cannot receive direct unsubsidized loans. In the federal loan program, they can only take out parent PLUS loans, which have higher interest rates and fees.
How Much Can You Borrow in Subsidized and Unsubsidized Loans?
The amount you can borrow depends on two factors: your year in school and whether you’re financially independent from your parents. That’s determined by a set of questions on the FAFSA.
Both direct subsidized and unsubsidized loans have relatively low annual loan limits. PLUS loans and many private student loans, on the other hand, let you borrow up to the school’s total cost—which includes tuition, fees, room, board, books, transportation and other expenses—minus other financial aid you’ve gotten.
If you’re an independent student or a dependent undergraduate student whose parents didn’t pass the credit check required to get PLUS loans, you can take out a higher amount of unsubsidized loans.
You or your parent won’t pass the PLUS loan credit check if you have more than about $2,000 in debt that’s at least 90 days delinquent, or if you had a bankruptcy, foreclosure or certain other negative marks on your credit report in the past five years. You may still be able to get a PLUS loan, though, by using a qualified co-signer, or by explaining the reasons for the negative marks on your credit to the satisfaction of the U.S. Department of Education.
Here’s how the subsidized and unsubsidized borrowing maximums break down:
| Year in school | Dependent students, except students whose parents can’t get PLUS loans | Independent students and dependent undergraduates whose parents can’t get PLUS loans |
|---|---|---|
| First-year undergraduate | Total subsidized and unsubsidized loan limit: $5,500 | Total subsidized and unsubsidized loan limit: $9,500 |
| Second-year undergraduate | Total subsidized and unsubsidized loan limit: $6,500 | Total subsidized and unsubsidized loan limit: $10,500 |
| Third-year and beyond undergraduate | Total subsidized and unsubsidized loan limit: $7,500 | Total subsidized and unsubsidized loan limit: $12,500 |
| Graduate or professional student | N/A (all are considered independent) | Total unsubsidized loan limit: $20,500 (cannot get subsidized loans) |
| Aggregate loan limit | Total subsidized and unsubsidized loan limit: $31,000 | Total subsidized and unsubsidized loan limit for undergraduates: $57,500 |
It’s possible to get student loans for more than four years of study, as long as you maintain “satisfactory academic progress,” as defined by your school. That usually means taking a certain number of credits each semester or maintaining a certain GPA. If you don’t meet these guidelines, you could lose your eligibility for federal student aid.
Key Differences: Subsidized vs. Unsubsidized Loans
There are some substantial differences between federal direct subsidized and unsubsidized loans. But both are still a better bet than PLUS loans or private loans in most cases since they’re less expensive and don’t require a credit check.
| Feature | Subsidized loans | Unsubsidized loans |
|---|---|---|
| Who may borrow | Undergraduates only | Undergraduates, graduate students and professional students |
| How interest is treated | Borrower does not pay interest while in school at least half-time, during the grace period or during deferment periods | Interest accrues at all times |
| Interest rate | 0.0275 | 2.75% for undergraduates, 4.30% for graduate and professional students |
| Loan disbursement fee | 0.01059 | 0.01059 |
How Do You Pay Back Unsubsidized and Subsidized Student Loans?
Federal student loans have several repayment options. Direct subsidized and unsubsidized loans qualify for all federal repayment plans, though you may have to meet other criteria for certain income-driven repayment plans.
Unless you choose another option during your mandatory exit counseling session, you’ll automatically be placed on the 10-year standard repayment plan, which breaks up your balance into 120 monthly payments. Your other repayment options include:
- Graduated repayment. You’ll pay less at first, then payments will steadily increase. The plan lasts for 10 years.
- Income-driven repayment. There are four primary plans that call for monthly payments based on income: income-based repayment, income-contingent repayment, Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). The best option depends on your circumstances, so consult with your student loan servicer—the company that manages your payments—for advice. You’ll make payments for 20 or 25 years, depending on the plan, and the remainder of the balance will be forgiven if there’s anything left at that end of the term.
- Extended repayment. You’ll pay fixed or graduated monthly payments for 25 years. This is not an ideal option, since you’ll pay a lot in interest and won’t receive the benefit of forgiveness at the end.
If you need to pause payments, you can contact your servicer and apply for deferment or forbearance for up to 36 months. If you have subsidized loans and you qualify for deferment, this is the lower-cost choice. But either program will give you breathing room to pay other bills temporarily. For longer-term financial hardship, income-driven repayment makes more sense.
How Do You Apply For Federal Direct Loans?
To apply for any federal student loan—or federal financial aid, for that matter—submit the FAFSA for each year you’re in college. The FAFSA will help schools determine if you have enough financial need to qualify for subsidized loans. The school will send you an award letter after you’ve been accepted outlining the loan types and amounts it suggests you borrow.
You’re not required to take out the maximum amount of loans you’ve been awarded, and you can accept only a portion of the loans you were offered if you don’t need them. Once you’ve accepted your award, you’ll complete student loan entrance counseling through the federal government. You’ll then sign a contract explaining the terms of your loan.
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