College is a major investment in your future but can also be a significant financial burden.
If you need help paying for your education, you may be eligible for federal student aid, which includes grants, scholarships, work-study, and loans.
Loans are a type of financial aid that you have to repay with interest, so it’s essential to understand the different types of loans available and how they affect your finances.
This article will compare and contrast two common types of federal student loans: subsidized and unsubsidized. We’ll explain what they are, how they work, and how they differ regarding eligibility, interest, and repayment.
We will also provide tips and resources to help you make smart decisions about your college financing.
What Are Subsidized Loans?
Subsidized loans are a type of federal student loan that the government pays the interest on while you are in school, during a grace period or periods of deferment.
This means the amount you borrow will not grow over time, and you will only have to repay the principal amount.
Some key features of subsidized loans are:
- They are only available to undergraduate students who demonstrate financial need.
- They have a fixed interest rate that is set by Congress each year.
- They have a maximum loan limit that depends on your school year and dependency status.
- They have a grace period of six months after you leave school or drop below half-time enrollment, during which you do not have to make payments.
- They have various repayment plans, allowing you to choose how much and long you want to repay your loan.
What Are Unsubsidized Loans?
Unsubsidized loans are another type of federal student loan that accrues interest from the day you receive them, regardless of whether you are in school.
This means that the amount you borrow will increase over time, and you will have to repay both the principal and the interest.
Some key features of unsubsidized loans are:
- They are available to undergraduate and graduate students, regardless of financial need.
- They have the same fixed interest rate and maximum loan limit as subsidized loans.
- They allow you to pay the interest while in school or defer it until you enter repayment. However, if you defer the interest, it will be added to your principal balance, increasing the amount you owe and the interest you pay.
Comparison of Subsidized and Unsubsidized Loans
The table below shows a comparison between subsidized and unsubsidized loans:
Subsidized Loans | Unsubsidized Loans |
Interest paid by the government while in school, grace period, or deferment | Interest accrues from the day you receive the loan |
Only for undergraduate students with financial need | For both undergraduate and graduate students, regardless of financial need |
Maximum loan limit of $23,000 for dependent students and $65,500 for independent students | Same loan limit as subsidized loans |
A grace period of six months after leaving school or dropping below half-time enrollment | Same grace period as subsidized loans |
Various repayment plans, including income-driven options | Same repayment plans as subsidized loans |
Eligible for loan forgiveness programs under certain conditions | Same eligibility as subsidized loans |
Pros and Cons of Each Loan Type
Subsidized and unsubsidized loans have advantages and disadvantages, depending on your situation and preferences.
They include:
Pros of Subsidized Loans
- You save money on interest, as the government pays it for you while you are in school, during a grace period, or defer.
- When you enter repayment
- , you have a lower loan balance, as the interest does not accumulate over time.
- You can access federal benefits, such as deferment, forbearance, forgiveness, and consolidation.
Cons of Subsidized Loans
- You have to demonstrate financial need, which may limit your borrowing amount.
- You have to be enrolled at least half-time in an eligible degree or certificate program.
Pros of Unsubsidized Loans
- You do not have to demonstrate financial need, which may allow you to borrow more.
- You can use the loan for educational expenses, not just tuition and fees.
- You can pay the interest while in school or defer it until you enter repayment.
Cons of Unsubsidized Loans
- You pay more interest, as it accrues from the day you receive the loan.
- When you enter repayment, you have a higher loan balance, as the interest is added to your principal amount.
- You may end up paying more than you borrowed, depending on your interest rate and repayment plan.
How to Choose the Right Loan for Your Needs
Choosing the right loan for your needs depends on several factors, such as your financial situation, expected college duration, and career prospects.
Here are some tips to help you make the best decision:
- Start by filling out the Canada Student Financial Assistance (CSFA) Program, which will determine your eligibility for federal grants, scholarships, work-study, and loans. You can apply for CSFA:
- Review your financial aid offer from the school you plan to attend, which will show you the types and amounts of aid you are eligible for. Compare the costs and benefits of each option, and accept only the aid you need.
- If you need to borrow, prioritize subsidized loans over unsubsidized ones, as they will save you interest. However, do not borrow more than you need; you will repay it with interest.
- If you still need more money, consider other funding sources, such as private loans, scholarships, family contributions, or part-time jobs. However, be aware of the terms and conditions of each option and compare them with federal loans.
- Once you accept your loans, keep track of how much you borrow and estimate your future monthly payments. You can use online tools like loan stimulators to help you plan your repayment strategy.
Application Process for Federal Student Loans
Applying for federal student loans is a straightforward process as long as you follow these steps:
- Complete the CSFA, as mentioned above. You will need to provide information about your income, assets, household size, and the school you plan to attend. Also, create a Federal Student Aid ID (FSA ID), your username and password for accessing your federal aid information online.
- Review your Student Aid Report (SAR), which summarizes the information you provided on the CSFA. You will receive it by email or mail, depending on how you submitted the CSFA. Check for any errors or missing information and make corrections if needed.
- Receive your financial aid offer from the school you plan to attend, which will show you the types and amounts of aid you are eligible for. Depending on the school’s policy, you will receive it by email or mail. Review the offer carefully, and accept or decline each type of aid. You may need to complete additional steps, such as signing a promissory note or completing entrance counseling, before receiving your loans.
- Receive your loan disbursement, which is the payment of your loan funds to your school. Your school will apply the funds to your tuition, fees, and other charges and then disburse any remaining amount to you. You can use the money for educational expenses, such as books, supplies, transportation, or housing.
Tips for Managing Student Loan Debt
Managing your student loan debt can be challenging, but it is not impossible.
- Make a budget and stick to it. Track your income and expenses, and allocate some money for your loan payments. Try to reduce your spending on unnecessary or discretionary items and save some money for emergencies or unexpected costs.
- Pay more than the minimum amount if you can. This will help you pay off your loan faster and save you money on interest. You can also make extra payments at any time without any penalty.
- Enroll in automatic payments, if possible. This will ensure you never miss a payment and avoid late fees or penalties. Some lenders may discount your interest rate if you sign up for automatic payments.
- Communicate with your loan servicer, which is the company that handles your loan account and payments. They can provide you with information and assistance regarding your loan status, balance, interest rate, repayment plan, and options for relief. Update them with any changes in your personal or financial information, such as your name, address, phone number, email, or bank account.
- Seek help if you are struggling to make your payments. Do not ignore your loan debt, as it will not go away and may have severe consequences for your credit score, tax refunds, wages, or benefits. Instead, reach out to your loan servicer and explain your situation.
You can also ultimately minimize loan debt by opting for a financing option like an installment payment plan.
For example, Gratify helps ease the burden of accumulating student loan debt by collaborating with colleges to allow students to pay in more manageable installments.
Conclusion
Make sure to review your options carefully and borrow only what you need.
Subsidized loans will save you money on interest. Still, they may have stricter eligibility requirements, while unsubsidized loans may give you more flexibility. Still, they will cost you more in the long run.