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Subsidized vs. Unsubsidized Student Loans

May 7, 2008

by Scholarships.com Staff

Complicated student loan legal jargon is an unfortunate component of the borrowing process. Two words  all students should be familiar with before borrowing are "subsidized” and “unsubsidized”. Let's break these down:

Subsidized Loans Students who borrow subsidized loans through the Federal Direct or the Federal Family Education Loan (FFEL) programs will receive government-backed college money. Because the government agrees to compensate FFEL lenders for loan defaults, student lenders agree to offer low-interest loans. They do not charge students for the interest that accumulates during the college years and post-graduation six-month grace period as the government takes care of these costs. Unfortunately, not all students are eligible for federal subsidized loans because finances are among the eligibility criteria. Students whose FAFSA results suggest financial need and those whose parents applied for but were denied a PLUS Loan may take out subsidized loans.

Unsubsidized Loans While federally unsubsidized loans boast fewer benefits than subsidized ones, their interest rates still tend to be lower than those offered by private lenders.  Students are responsible for all interest that accrues during their years in school, deferment, and grace periods. As long as students don’t exceed their annual loan borrowing limits, they may take out both subsidized and unsubsidized loans. Because unsubsidized loans are not based on financial need, students who are not deemed needy by the government may still take out these loans. The borrowing limit on these loans will vary based on year in school and dependency status, but the sum may not exceed the estimated cost of attendance for each school minus other financial aid a student receives. Students may borrow both subsidized and unsubsidized loans during the same period as long as the limits for each are not surpassed.


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