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Difference Between Subsidized and Unsubsidized Federal Loans


Subsidized and unsubsidized federal loans are provided to the college students as a financial aid in the US so as to help them finance their studies. It is known as a federal student loan for students who need to cover their educational cost in their four years of college, university, community college, career or technical school. These loans are offered by the U.S. Department of Education. It is very important for a student or his or her parents to compare these loans in order to decide carefully which one of the two is suitable to fulfill their financial needs. One of the main differences between these two loans is the amount that you are allowed to borrow every year. However, there are a lot of other differences between the Subsidized and Unsubsidized loans.

Payment of Interest

When the students take admission in universities and colleges, the pressure built by the studies and back and back classes doesn’t usually let them do a job at the same time. Too much load of homework assignments and regular assessments leave them with no time or energy, so a loan option where all payments can be deferred and made after the college is a helpful option for students.

Subsidized Loan – With this type of loan, a student is not required to pay back the amount of interest while he or she is still in school. It is deferred to be paid in the future, and is subsidized by the federal government. Being a student, however, you are required to make all the deferred interest payments along with the principal amount, once you have completed your qualification and become a graduate. Even after completion of school or university education, the grace period for first 6 months is provided to the student.

Unsubsidized Loan – On the other hand, you can pay the interest amount of the loan while you are still attending the school, and the responsibility to make interest payment starts right from the beginning when the loan is provided to you. If, for some reason, a student chooses not to make interest payments while he is still in school, and in the grace period, deferment or forbearance period, his interest starts accumulating or accruing, and is then capitalized as it becomes a part of the principal amount. But it will increase the interest when a student leaves the school, because the interest will be charged at a higher principal amount.

Amount of Loan to Borrow

The amount of funds required by the students will determine the type of loan that should be selected by them. The cost of education in case of a state school is very different from that of a private school, especially if the private school is far away from home. So, the cost difference influences their decision to choose the loan.

Subsidized Loan – There is a definite cap on the subsidized loan, and a student can borrow up to a certain limit, if they choose to fund their education with this loan.

Unsubsidized Loan – This form of loan also has a cap amount, but a student is usually eligible to borrow more than $4,000 in one year.

Qualifying for a Loan

It is possible that personal circumstances of students may not allow them to qualify for a subsidized loan. Therefore, it is very important for them to read the loan requirements carefully before they start an application process.

Subsidized Loan – Issuance of subsidized loan is based on the financial status of the applicant along with certain requirements. If a student or his parents do not have a sound financial position, they may not be able to qualify for the loan.

Unsubsidized Loan – In case of unsubsidized loan, the choice of school will define how much funds a student is qualified to receive. Most of the times, students use the subsidized funds first, and then support it with an unsubsidized loan.

So, the parents or students must carefully consider all the aspects before they decide whether to choose the federal subsidize or unsubsidized loan.

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