Explore Loans Blog. Paying for college can be tough for families. Saving for college and applying for scholarships and grants can go a long way to foot the bill. Still, even with a healthy savings plan and plenty of financial aid, many families will need to take out student loans to cover the cost of college. If this is the case for your family, it is important to know that you are not alone. Marketplace reports that about 70 percent of students take out some kind of student loan to pay for college.
The overwhelming majority of these student loans are federal loans. In fact, 92 percent of student loans are federal loans. There are many benefits to federal loans, but it can be difficult to understand the differences between all the kinds of loans. Here is what students need to know about subsidized versus unsubsidized loans and which is best for you when it comes to paying for college. In addition to financial aid like grants and scholarships, the FAFSA is required for families to qualify for federal student loans.
Even if you do not expect to qualify for need-based financial aid, you must still submit the FAFSA if you plan to apply for a federal loan. When you complete and submit the FAFSA, federal student loans, also known as Direct Loans, are often included as part of your financial aid package.
As part of that financial aid package, the FAFSA helps determine how much student aid you are eligible to receive. Each type of federal loan has its drawbacks and benefits. So, what are the differences between subsidized versus unsubsidized loans, and what do these terms mean? What Are Direct Subsidized Loans?
And if your plan allows some of your loan balance to be forgiven, you may have to report that as taxable income. The upside is that paid student loan interest is tax-deductible. Deductions reduce your taxable income for the year, which may lower your tax bill or add to the size of your refund.
The government pays the accruing interest on subsidized loans while a borrower is in school and during the loan's six-month grace period. Both types of loans are offered by the federal government and must be paid back with interest. However, the government will make some of the interest payments on subsidized loans. Unsubsidized loans have many benefits.
These loans, unlike subsidized loans, can be used for undergraduate and graduate school, and students do not need to show financial need to qualify. The interest does begin accruing as soon as you take out the loan, but you don't have to pay the loans back until after you graduate, and there are no credit checks when you apply, unlike private loans. Subsidized loans offer many benefits if you qualify for them. While these loans are not "better" than unsubsidized loans, they offer borrowers a lower interest rate than unsubsidized loans.
The government pays the interest on them while a student is in school and during the six-month grace period after graduation. However, subsidized loans are only available to students who demonstrate financial need, and you can use them for undergraduate studies. You can pay back your subsidized loan anytime. Still, most students begin paying their loans back after they graduate, and the loan payment is required six months after graduation, known as the "grace period" when the government continues to pay the interest due on the loans.
When your loan enters its repayment phase, your loan servicer will place you on the Standard Repayment Plan, but you can request a different payment plan at any time. Borrowers can make their loan payments online via their loan servicer's website in most cases. Both direct subsidized and unsubsidized loans can help pay for college. Just remember that either type of loan eventually must be repaid and with interest.
Department of Education: Federal Student Aid. The White House. Department of Education. Internal Revenue Service. Student Loans. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Saving for College. College Saving Plans. Getting Started. Scholarships and Grants: Free Money. Types of Student Loans. What Loans Cost. Decoding Student Aid Offers. Subsidized: Undergraduate students enrolled at least half time. Unsubsidized: Undergraduate, graduate and professional degree students enrolled at least half time.
This is equal to six years for a typical four-year program or three years for a typical two-year program. Unsubsidized: There is no time limit on using these loans. Unsubsidized: Any students can borrow, regardless of financial need. Subsidized: Annual loan limits vary, but they are typically lower than unsubsidized loan limits. Unsubsidized: Annual loan limits vary but are typically higher than subsidized loan limits.
Subsidized and unsubsidized: 1. Subsidized: The fixed annual percentage rate is 3. Unsubsidized: The fixed APR is 3. These rates apply to loans disbursed on or after July 1, , through June 30, Subsidized: Interest is paid by the Education Department while you're enrolled at least half time in college. Unsubsidized: Interest begins accruing as soon as the loan is disbursed, including while students are enrolled in school.
Subsidized: No payments are due in the first six months after you leave school. The Education Department will continue to pay interest during this time. Unsubsidized: Loan payments are not due in the first six months after you leave school, but interest will continue to build. Subsidized: Interest is paid by the Education Department during deferment, which lets you temporarily pause payments.
Unsubsidized: Interest continues to collect during deferment and will be added to your principal loan amount. Taking on too much student loan debt may make repayment difficult after you graduate. Borrow federal loans first: Private student loans often carry higher interest rates and require a co-signer if a student borrower has no credit history. Both unsubsidized and subsidized federal loans also offer more borrower repayment plans and forgiveness options than private loans.
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