Over the past 15 years, college tuition has escalated, some times to the tune of 25%-75% higher than in 1990, depending on the school and state.
With the competitive nature of the workplace, more high school graduates feel compelled to seek a college education in order to secure decent employment opportunities.
The combination of these two factors has brought the country a new generation of students who desperately need tuition assistance.
In order to give more young adults the opportunity to attend college, the federal government has establish several federally sponsored loan programs to help these prospective students pay for tuition and books.
The most popular of these programs is the Federal Direct Stafford Loan program, which offers low interest subsidized and unsubsidized loans.
What Is An Unsubsidized Loan And Subsidized Loan?
While both of these types of loans are similar in nature, there are some important differences.
Here is the easiest way to define unsubsidized loan and subsidized loan:
Unsubsidized Definition – A federally funded student loan where the interest is always charged to the student. The student has the option of paying the interest on a monthly basis or having it accrued and added to the principle until monthly payments are initiated.
Subsidized Definition – A federally funded student loan where the interest is paid by the federal government on behalf of the student until monthly payments are initiated.
What Are The Primary Differences In Loan Terms For A Subsidized Loan Vs Unsubsidized Loan?
As mentioned above, there are some major differences.
Subsidized loans are granted based on need for undergraduate students only. Unsubsidized loans are not determined on the basis of need, so all undergraduate and graduated students are eligible.
Interest Payments Prior to Graduation and Grace Period (6 months after graduation)
On subsidized loans, the interest incurred during this time is paid by the federal government. On unsubsidized loans, it is the responsibility of the borrower.
On Subsidized loans, the maximums by year are:
- Year 1 - $3500
- Year 2 - $4500
- Year 3 and higher -$5500
- Lifetime max -$23,000
On unsubsidized loans, the annual maximums are:
- Undergraduate Students – $2,000 per year with a lifetime max of $7,000
- Graduate students - Year 1&2 is $6,000, thereafter $7,000 per year with a lifetime max of $34,000
- Some professional programs - Annual max of $20,500
- Some veterinary medicine programs – Annual max of $40,500
Another difference between subsidized vs unsubsidized loans is the actual interest rate charged. While rates are always subject to change, subsidized loans carry a rate that is roughly 50% lower than the rate charged on unsubsidized loans.
Other Eligibility Requirements
Regardless of any distinctions between a subsidized vs unsubsidized loan, both loans carry other eligibility requirements. They include:
- Males between the ages of 18-25 are required to register with the Selective Service draft
- Students must not owe any amounts against a federal grant
- All students must maintain a 2.5 GPA
- All students must not have any drug offenses on their record
- Must have a valid Social Security number and a high school diploma or GED equivalent
In order to apply for government student loan programs, students are required to submit the Free Application for Federal Student Aid (FAFSA).
This application includes financial resources and dependency status. After the application review process is completed, students will be notified regarding the approval of a subsidized or unsubsidized loan.
Depending on the situation, it is possible to qualify for both types of loans. These situations are generally reserved for the neediest applicants who are awarded the subsidized loan program first with the unsubsidized loan program acting as a supplemental loan.
Aside from the Federal Direct Stafford Loan program, two other useful government loan programs are:
Perkins Loans – Subsidized funds issued by the school from a federal allocation. These loans are discretionary based on need.
PLUS Loans – Unsubsidized loans available to students who need addition funds to cover tuition. The interest rates are generally high than Stafford loans, but lower than private loans.