It’s that time again! People are looking to go back to school and are searching for information on subsidized versus unsubsidized Stafford Loans. I’ve actually had two friends ask me about the difference already.
Although, I hate the fact that many of us graduate with student loan repayments, I know that it has now become a fact of life. There are two main differences, which we will discuss below. We will also take a look at many of the details that make these two options very similar.
Subsidized Versus Unsubsidized Stafford Loans
What Is A Stafford Loan?
Taken directly from the Federal Student Aid website:
Direct Stafford Loans, from the William D. Ford Federal Direct Loan (Direct Loan) Program, are low-interest loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. Eligible students borrow directly from the U.S. Department of Education (the Department) at participating schools.
These are different than the private student loans that you may receive from a bank or other financial institution. When evaluating the differences between subsidized versus unsubsidized Stafford Loans, it is important to remember that in both cases, you are borrowing directly from the federal government.
Eligibility For A Federal Direct Loan
Eligibility For Subsidized And Unsubsidized Stafford Loans
Since subsidized and unsubsidized Stafford Loans are part of a student’s federal financial aid package, there are a number of requirements that must be met in order to be eligible for a direct loan:
- U.S. citizen or an eligible non-citizen with a valid social security number
- Working toward a degree or certificate in an eligible program
- Enrolled at least half-time as a regular student
- At a school that participates in the Direct Loan Program
- Have a high school diploma, GED or pass an approved ability-to-benefit (ABT) test
- Register with the Selective Service if you’re a male between 18 and 25
- Maintain good grades
- Must not be in default on a federal loan
How To Apply For A Direct Stafford Loan
In order to apply for subsidized Stafford Loans (or even unsubsidized) you must complete the Free Application for Federal Student Aid (FAFSA). You can complete the application online, and the level of financial aid which you are offered will be determined by many factors.
Once you receive your award package, the details regarding what loans you are eligible for (as well as other types of financial aid) will be included.
Hopefully, you will receive enough in aid and grants to cover the cost of your education (when combined with any savings you may already have). If you have to borrow money for your education, then you should take advantage of the subsidized Stafford Loans first.
Borrowing Limits For Unsubsidized And Subsidized Stafford Loans
Year Dependent Undergraduate Student (except students whose parents are unable to obtain PLUS Loans) Independent Undergraduate Student (and dependent students whose parents are unable to obtain PLUS Loans) Graduate and Professional Degree Student
First Year $5,500—No more than $3,500 of this amount may be in subsidized loans. $9,500—No more than $3,500 of this amount may be in subsidized loans. $20,500—No more than $8,500 of this amount may be in subsidized loans.
Second Year $6,500—No more than $4,500 of this amount may be in subsidized loans. $10,500—No more than $4,500 of this amount may be in subsidized loans. $20,500—No more than $8,500 of this amount may be in subsidized loans.
Third and Beyond (each year) $7,500—No more than $5,500 of this amount may be in subsidized loans. $12,500—No more than $5,500 of this amount may be in subsidized loans. $20,500—No more than $8,500 of this amount may be in subsidized loans.
Maximum Total Debt from Stafford Loans When You Graduate (aggregate loan limits) $31,000—No more than $23,000 of this amount may be in subsidized loans. $57,500—No more than $23,000 of this amount may be in subsidized loans. $138,500—No more than $65,500 of this amount may be in subsidized loans. The graduate debt limit includes Stafford Loans received for undergraduate study.
As you can see in the chart above, you are allowed to have both unsubsidized and subsidized Stafford Loans in the same year. This is good for those students for whom the out of pocket expense will be greater than the subsidized direct loans limit.
Repayment Of Federal Direct Student Loans
The one good thing about both of these types of student loans is that you aren’t required to pay them until after you drop below half-time status for a period of at least 6 months. If you maintain half-time status from start to finish, you will not be responsible for making any student loan payments until after you graduate.
Another good thing is that if you need to take a break from school for longer than 6 months and you begin to make payments (see “grace period” below), once you enter another eligible program (or continue on in the same one) your loan payments will be placed on hold once again. This is great for people who decide to go back to school after a break, or who are seeking an additional degree.
The main point to remember is that while you’re enrolled in an eligible program at least half-time, you are not required to make any payments on your federal student loans. Try to use a student loan calculator to determine what your monthly payments will look like after graduation.
Federal Student Loan Grace Period
Once you graduate, leave school, or drop below half-time enrollment, you have a period of time before you have to begin repayment. For federal Stafford Loans, that “grace period” is 6 months.
Theoretically, this gives a new graduate 6 months to find employment and cover their job hunting expenses, before they begin to repay their student loan. Although, I’m sure that many graduates would like much more than 6 months before those payments start up! Once the 6 months are up, they may considering becoming a part of the contingent workforce, in order to pay back the loan.
Although, with the current state of the economy, I can picture more and more graduates trying to get student loan forgiveness in order to wipe away their debt.
Unsubsidized Versus Subsidized Stafford Loans: So What’s The Difference?
Up to this point, most of the specifics regarding Direct Stafford Loans apply to both subsidized and unsubsidized. However, there are two distinct differences that makes one significantly more appealing than the other.
Interest Rate On Direct Stafford Loans
This is the first area in which you will find a difference between subsidized Stafford loans and unsubsidized Stafford loans. The date in which interest begins to accrue on the loan depends on which type you have received – which makes a huge difference in how much you will ultimately pay back to the government!
As I mentioned above, you are not required to make any payments toward your federal student loan while you are at least a half-time student. However, from the moment your unsubsidized Stafford loan is dispersed, interest begins to accrue.
That means that once you graduate, you will owe more money to the federal government than you took out in loans! As you are taking your classes, interest is accruing on the money that you borrowed. This accrued interest adds thousands of dollars to the balance of your loan, making it that much harder to pay off.
As the name implies, there is a “subsidy” attached to these loans. While you are in school (at least half-time), no interest is charged against your loan. For all intents and purposes, the loan is being subsidized by the government, who is paying the interest for you.
So, those thousands of dollars that get added to the balance of your unsubsidized student loan, aren’t added to your balance if you have a subsidized Stafford loan!
How Are They Awarded?
Subsidized Stafford loans are awarded based on your financial need. They are considered to be a part of your overall financial aid package, and therefore, you can be awarded less than the maximum amount. Here is an explanation of the difference from the government’s student aid website:
Depending on your financial need, you may be eligible to receive a subsidized loan for an amount up to the annual subsidized loan borrowing limit for your level of study. If you have education expenses that have not been met by subsidized loans and other aid, you may also receive an unsubsidized loan so long as you don’t exceed the combined subsidized and unsubsidized annual loan limits.
So, even if the federal government decides that you and/or your parents earn too much, and therefore, you do not qualify for a subsidized student loan; you can still take out an unsubsidized Stafford loan – up to the combined annual loan limits. This is important to remember especially if you are a broke college student – you can actually borrow more than the cost of your tuition to spend on books and other things.
Unsubsidized Versus Subsidized Stafford Loans: Which One Is Better?
Since the interest accrues immediately on an unsubsidized student loan, most students will want to avoid that option at first. However, since the subsidized Stafford loan is awarded based on the financial need of the student, many times the award is not enough to cover all costs.
The ideal situation – besides having more than enough aid and savings to cover all costs (learn how to save money on textbooks) – would be to only need to take out a subsidized Stafford loan. This way, you don’t have to worry about amassing interest on your loan until after you have completed your education.
If you must take out an unsubsidized Direct Stafford loan, then be sure to pay off (at least) the interest each month. That way, when you enter into the repayment phase of your loan, you will only owe what you initially took out.