With the pressures of leaving home for the first time, taking on a lot of classwork, and meeting new people, adding financial aid options may make your head spin even more. It can be hard to determine which loans are subsidized and unsubsidized as a first-time college student. Our guide will help you understand how these two loans are different, what each one can do for you, and which you should pay off first. Please look at each loan type to see what they are and why you need them.
Student loans: subsidized and unsubsidized
It’s important to know that there are two main types of federal student loans: direct subsidized and direct unsubsidized. Following the FAFSA, your college will figure out how much money you need to pay for school, based on how much money you and your parents make and how much money you have in savings, investments, and other assets. You can get federal student loans based on how much money you have.
Some loans are paid for by the government, while others are not.
Directly subsidized loans
You should get a direct subsidized loan if you want to get a student loan. It has better terms while you are in school. For the most part, the interest on a direct subsidized loan is paid for while you are in school at least half-time. It takes six months after graduation for the Department of Education to start paying the interest on the loans. This is called a moratorium.
It’s significant to keep in mind that the Department of Education only allows you to get direct subsidized loans for a limited amount of time. They can only be used for 150 percent of your program’s length. A four-year bachelor’s degree program means that you only qualify for direct subsidized loans for six years. This means that you can only get these loans for so long. There are then direct unsubsidized loans that must be used after that! Also, only undergraduates who have a school-determined financial need can get subsidized loans.
Unsubsidized direct loans
They are the same as subsidized loans in that the federal government backs them, but they have a big difference in interest. You have to pay back the interest on the loan while you are in school with unsubsidized loans. The government pays for direct subsidized loans. In some cases, you can select to pay no interest. When you finish school, your lender will keep the interest and use it to pay off your loan.
To give you an example, if you still owe $2,000 in interest on your loan after you finish school, your lender will add that money to your debt. It may not be in your better interest to get an unsubsidized loan, but there are a few good things about it. Because they are available to almost all college students, even those who will need more than 150 percent of their program’s time frame to finish, they have one big advantage: They also don’t limit how much you can borrow based on how much money your house makes. Here are some more things to look at about subsidized and unsubsidized student loans, so let’s look at them now.
Loan restrictions for subsidized vs. unsubsidized student loans
There are different borrowing limits for direct subsidized and unsubsidized loans, but they work together to make total borrowing limits. This is called “aggregate loan limits.” A first-year student who is still dependent on their parents’ taxes can get a total of $5,500 in loans each year. Only $3,500 of that can come from a direct loan that isn’t subsidized by the government, which is called a “direct subsidized loan.” The last $2,000 must come from a loan that is not subsidized.
It’s now practicable for you to get a total of $6,500 in loans each year as a second-year dependent student, but only $4,500 of that can be in the form of a direct subsidized loan. For the first three years of college, you can get up to $7,500 in loans total. But only $5,500 of that money can come from a direct subsidized loan. The last $2,000 must come from a loan that is not subsidized.
When you are a dependent undergraduate student, the total amount of money you can borrow for all of your time at school is $31,000. This means that only $23,000 of that can come from subsidized loans. The rest of the money needs reach from unsubsidized loans. No one can claim you dependent on their taxes for independent students. The total annual loan limit for subsidized and unsubsidized loans together rises to $9,500 in your first year of school. In your second year and onward, that number rises to $10,500, then $12,500, and so on.
The total amount of loans they can get goes up for independent students, but the subsidized loan limits stay the same for dependent students. They all happen on the side that doesn’t get help. Only $23,000 of the $57,500 that independent students can borrow during their college years can come from subsidized loans, and the government must pay back the rest. The graduate scholar can only take out unsubsidized loans.
Graduate students can get up to $138,500 in loans from their undergraduate studies. If you get a direct subsidized loan, you can only get $65,500. This includes the subsidized loans graduate, and professional students could get before July 1, 2012. As an undergraduate, you can only borrow up to $57,500 from a Direct PLUS Loan or a private student loan. As a graduate, you can borrow up to $138,500 from a Direct PLUS Loan or a private loan.
Interest rates for subsidized and unsubsidized student loans
Subsidizing something is all about cutting costs, so it’s easy to think that direct subsidized loans will have a better interest rate. This assumption is wrong. Otherwise, direct subsidized loans and direct unsubsidized loans have the same interest rates. After you graduate, you have six months to repay your loans.
When the last interest rates changed for students who get money from the government between July 1, 2019, and July 1, 2020, both loans had 4.53 percent interest rates for undergraduates and 6.08 percent interest rates for graduate and professional students. These interest rates have nothing to do with your credit score or credit history, so don’t worry about that.
During your time in school, the Department of Education will cover your interest payments, as well as the six-month deferment period after you finish school. This is called a direct subsidized loan. Getting a subsidized federal loan costs a lot less than getting an unsubsidized federal loan. Direct subsidized loans can save you about $3,000 in interest charges while you’re in school if you take the maximum amount.
Loan costs for subsidized vs. unsubsidized student loans
There are fees for both types of loans when the money is sent out. These loan fees are a small amount that the federal government takes out of the money you get from the loan. You don’t have to settle this fee out of your pocket. At the time this was written, the fees for both subsidized and unsubsidized loans were the same at the time. Between Oct. 1, 2019, and Oct. 1, 2020, there is a 1.059% loan fee. Suppose you took out a $5,000 federal student loan for the school year. The federal government would take $52.95 out of that money to pay fees.