What is the difference between Subsidized and Unsubsidized Loan for a federal student loan?
Chris:
The subsidized Stafford loan is one of several forms of need-based Federal Student Aid, and like all forms of need-based aid, a student only qualifies for a subsidized Stafford if he/she has demonstrated “exceptional need” on the FAFSA application.
A student has demonstrated this exceptional need if his/her EFC score is 4041 or less.
With a subsidized loan, the government pays the interest as it accrues on the loan – and will continue to pay that interest from the date that the loan is disbursed, until the borrower has been out of school for 6 months. Depending on the amount borrowed, this has the potential to save the borrower thousands of dollars.
In the case of a non-subsidized loan (the typical form), the interest accrues from the date of disbursement. The borrower is offered the option to pay the interest (only) as it becomes due every month, but most borrowers elect to allow the interest to simply be added to the principal, increasing the balance of their loan every month. All student loans are designed to allow you to do this if you choose, but it means that you’ll owe more than you borrowed by the time you start paying the money back, 6 months after graduation.
A subsidized loan is not automatic, even for students who demonstrate exceptional need – however, in most cases, the financial aid office will qualify all exceptional need applicants for a subsidized loan. However, there are strict annual limits to the amount of subsidized borrowing that a student can do. A first year dependent undergrad can only borrow a maximum of $3500 in subsidized loans.
It is common to see a financial aid package that includes $3500 in subsidized and $2000 in unsubsidized loans, which offers the student the maximum annual Stafford amount of $5500. Students who see that kind of situation on an aid offer are not being offered a choice (”Would you rather borrow $3500 subsidized or $2000 unsubsidized?), rather the school thinks the student will need both, and they’re simply offering the maximum possible amount of subsidized funds, and topping it off with the maximum additional amount of loans available to the student (which must be unsubsidized).
I hope that helps – good luck!
