Should You Choose a Subsidized or Unsubsidized Student Loan?

Paying for college can be tough for families. Saving for college and applying for scholarships and grants can go a long way to foot the bill. Still, even with a healthy savings plan and plenty of financial aid, many families will need to take out student loans to cover the cost of college.

If this is the case for your family, it is important to know that you are not alone. Marketplace reports that about 70 percent of students take out some kind of student loan to pay for college. The overwhelming majority of these student loans are federal loans.

In fact, 92 percent of student loans are federal loans. There are many benefits to federal loans, but it can be difficult to understand the differences between all the kinds of loans. Here is what students need to know about subsidized versus unsubsidized loans and which is best for you when it comes to paying for college.

Federal Loans Start With the FAFSA

The process for applying for federal student loans begins with the FAFSA. In addition to financial aid like grants and scholarships, the FAFSA is required for families to qualify for federal student loans. Even if you do not expect to qualify for need-based financial aid, you must still submit the FAFSA if you plan to apply for a federal loan.

When you complete and submit the FAFSA, federal student loans, also known as Direct Loans, are often included as part of your financial aid package. As part of that financial aid package, the FAFSA helps determine how much student aid you are eligible to receive.

Each type of federal loan has its drawbacks and benefits. So, what are the differences between subsidized versus unsubsidized loans, and what do these terms mean?

What Are Direct Subsidized Loans?

Your first option when it comes to federal loans is likely the Direct Subsidized Loan. Sometimes called Stafford Loans or Direct Loans, these loans should be your first option when it comes to borrowing for the cost of college.

Direct Subsidized Loans are based on financial need, as opposed to credit or payment history. That means there is no credit check required to qualify for a subsidized loan. Your school determines how much you can borrow, and it cannot be more than your financial need.

It is also important to note that Direct Subsidized Loans are only available to undergraduate students. If you're looking for a loan to fund your graduate or professional degree, you'll have to consider other options.

The biggest advantage of subsidized loans is how interest is applied. In a subsidized loan, the federal government pays the interest on the loan while you are still in school at least half-time. (Half-time enrollment typically means taking at least six credit hours of classes.) This means that the interest isn't added to your total repayment balance while you're in school, unlike with other loans.

Another important thing to remember about direct subsidized versus unsubsidized loans is the total amount you can borrow. Studentaid.gov shows how much of your loans can be subsidized for each year of higher education. This is also known as your aggregate loan limit.

The aggregate loan limit is essentially a cap on how much students can borrow each year for school. It prevents students from borrowing more than they need to keep them out of tough financial situations. Of course, sometimes you will need to borrow beyond your allowed amount for subsidized loans. Thankfully, there are other federal options in the form of unsubsidized loans.

What Are Direct Unsubsidized Loans?

One of the biggest differences between subsidized versus unsubsidized loans is who can qualify. Unlike subsidized loans, Direct Unsubsidized Loans are available to all students regardless of financial need. That includes both graduate and undergraduate students.

However, like subsidized loans, your educational institution determines how much you can borrow. Although it's not based on financial need, colleges determine this amount based on your cost of attendance and other financial aid.

The other key differentiator is that, unlike subsidized loans, the federal government does NOT cover the interest while the student is in school. Interest will start to accrue as soon as the loan is disbursed. Any interest that has accrued on the loan before the borrower leaves school will be capitalized back into the principal amount of the loan.

That means that if your loan was for $10,000 and you accrued $1,000 of interest during school, your loan is now for $11,000 instead of $10,000. A slightly higher principal may not seem like much when you graduate, but it can add up to potentially paying thousands extra over the life of your loan.

This is a major benefit of paying off student loan interest while in school. If you can swing it, any interest you can pay while still in school can help to greatly reduce the total amount you pay overall.

NC Assist Can Bridge the Gap When Federal Loans Are Not Enough

We hope this helps you understand the key differences between subsidized versus unsubsidized loans. Now, you should be ready to make an informed decision about borrowing for school.

Even with a combination of subsidized and unsubsidized loans, it may not be enough to cover the full cost of college. An alternative private loan can be an effective way to bridge the gap to cover the cost of attendance for college.

The NC Assist Loan is serviced by College Foundation, Inc., your state-based nonprofit lender. With competitive interest rates and no fees, NC Assist can be a valuable option for parents to cover the cost of attendance. Discover how an NC Assist Loan can make a difference in covering the cost of college for your family.