The difference between subsidized and unsubsidized loans assumes importance for students who are availing Federal student loans for the sake of pursuing higher education. These Federal student loans are the logical choice for people desirous of pursuing higher education especially if they have bad credit. This is because both subsidized and unsubsidized Federal loans are disbursed to people regardless of their credit scores or credit history. In addition to helping students pursue higher education, these loans can help students build their credit score and credit history provided they make it a practice to repay the borrowed sum in a timely fashion. The difference between subsidized and unsubsidized loans is as follows.
What is Subsidized Loan
The disburser of a subsidized loan allows the borrower to defer paying interest payments on the borrowed sum during the deferment period. The grace period that follows the deferment period also brings relief to the borrower who can further postpone repayment. These deferments are made possible since the disburser, generally the govt. or a charitable organization, agrees to pay interest on the principal during the deferment and the grace period. Once the aforementioned periods elapse, the borrower starts paying interest on the principal and repays the borrowed sum.
What is Unsubsidized Loan
Procuring an unsubsidized loan results in the borrower having to pay interest and principal on the borrowed sum from the time the loan is disbursed till the date of maturity. In some cases, the borrower may be allowed to defer interest payments. However the interest, that is deferred, accrues interest and the borrower becomes liable for a greater sum. Hence, it is never advisable to defer repayments on an unsubsidized loan since deferring interest on an unsubsidized loan means paying more interest.
How are Subsidized Loans Different from Unsubsidized Loans?
- Both subsidized and unsubsidized Federal student loans are fixed interest rate loans. However, the interest that is charged on the former is less than the interest charged on the latter.
- The interest on unsubsidized student loans is capitalized which is the same as saying that deferring repayments on subsidized loans results in the borrower having to pay interest, on the interest that accrues during the deferment period. The interest on unsubsidized loans is not capitalized.
- Subsidized loans are need based while unsubsidized Federal student loans are not disbursed on the basis of financial consideration.
- During the grace period, one is not expected to pay either interest or principal on subsidized loans. However, one has to pay interest on unsubsidized loans even during the grace period, else the interest will be capitalized.
- A person, who has obtained a subsidized loan, is eligible to avail an unsubsidized loan provided the total amount that is borrowed is within the specified limit. Vice versa does not always hold.
Federal Perkins Loans and Federal Stafford Loans, both Direct and those procured under the Federal Family Education Loan Program (FFEL), are popular subsidized student loans.
Popular Unsubsidized Student Loans
Unsubsidized Federal Stafford Loans, both Direct and those procured under the Federal Family Education Loan Program (FFEL), and Federal PLUS loans for parents/guardians are popular unsubsidized student loans.
People, who are worried about repaying student loans may benefit from the article, 'Defaulted Student Loan Help'. One needs to fill out the FAFSA or the Free Application for Federal Student Aid in order to avail a subsidized loan. The school will then review the results and will inform the student about the eligibility for procuring the desired loan.
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