Subsidized vs Unsubsidized Loans

What is a Subsidized Loan?

• Subsidized loans are loans offered to both undergraduate and graduate students, with eligibility based on maintaining a minimum GPA and enrollment in a full-time program.

• A loan that requires students to repay interest immediately and is awarded based on their credit score or employment history

• A loan that covers the entire cost of attendance without factoring in a student’s existing financial aid or personal contributions.

• A subsidized loan is a loan that is only given to undergraduate students

What is an Unsubsidized Loan?

• Unsubsidized loans are exclusively for graduate students and require proof of employment or a co-signer to qualify.

• An unsubsidized loan is a loan that is given out to both undergraduate and graduate students

• This type of loan covers only tuition costs, and the government pays the interest while the student is enrolled in school.

• Eligibility for an unsubsidized loan depends on a student’s financial need, similar to subsidized loans.

Similarities Between Subsidized and Unsubsidized Loans

• Both loans do not require students to make payments if they are at least partially enrolled in school

• Eligibility for both loans is based solely on financial need, as determined by the FAFSA

• Both loans offer grace periods before repayment fulfillments start

• Both subsidized and unsubsidized loans require the government to pay the interest while the student is enrolled in school.

Differences Between Subsidized and Unsubsidized Loans

• Unsubsidized loans have higher interest rates than subsidized loans because they are riskier for the government.

• Subsidized loans require a credit check and a co-signer, while unsubsidized loans are available to anyone without financial documentation.

• The borrower is responsible for paying the interest on unsubsidized loans, while the government pays the interest for subsidized loans under certain circumstances

• Subsidized loans are based on financial need, while unsubsidized loans are not

What are Federal loans?

• Federal loans are issued by private banks and credit unions but guaranteed by the government, allowing lenders to offer lower interest rates.

• Federal loans require a high credit score and collateral, like a car or property, to qualify.
  

• Loans made by the government, with terms and conditions set by law and include many benefits (fixed interest rates, income-driven repayment plans, forgiveness, etc.)

• Federal loans have variable interest rates that reset every year based on market conditions.

What are Private Loans?

• Loans made by private organizations like banks, credit unions, and state-based/ affiliated organizations with terms set by the lenders.

• Private loans are funded by the U.S. Department of Education and offer fixed interest rates identical to federal loans.

• Private loans do not require a credit check or cosigner, making them accessible to all students regardless of financial history.

• Private loans provide subsidized interest, meaning the government covers interest charges while you’re in school.

Federal vs Private what's the difference?

• Private loans always have fixed interest rates, just like federal loans, but they’re slightly lower because banks compete with the government.

• Federal loans are only for graduate students, while private loans are designed exclusively for undergraduates with financial need.

• Many private loans require payments while in school (few allow deferment - temporary delay in repayment)

• Federal loans require a strong credit score and collateral, while private loans are guaranteed by the government and don’t check credit history.

Why Are Knowing These Differences Between Loans Important?

• It ensures eligibility and accessibility knowing which loans require financial aid versus those available to all helps students prioritize options they qualify for

• These differences may impact a person’s decision on what type of loan they decide to acquire

• It helps borrowers prioritize loan options strategically, such as using federal loans before considering private loans. This minimizes reliance on high-interest debt and maximizes access to flexible repayment options.

• Awareness of repayment terms and interest accrual empowers borrowers to avoid unmanageable debt and plan for their financial future.

What is the Repayment Process?

• For some, you can begin by repaying principal and interest or just interest, or even nothing while in school

• Federal student loans have benefits like loan forgiveness options

• Missed payments can accrue interest and also harm credit score

• Different banks offer different repayment timelines

What should you NOT do when taking out loans?

• Ignore interest rates.

• Borrow more than you need.

• Skip filing the FAFSA.

• Take out loans without understanding the terms.