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Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

Published on May 8, 2018 by Staff Writer

Finances are complicated. College isn’t cheap. You have to make a lot of decisions, and that’s why it is important to know what you are getting into. Some terms are ambiguous, but the difference can cost you money. Something as simple as understanding the difference between subsidized and unsubsidized loans can help you plan your finances and save money.

So, What Is The Difference Between Subsidized And Unsubsidized Loans?

So, you probably figured out that subsidized loans are cheaper than unsubsidized ones, but the real question is: How are they subsidized? The simple answer is interest: The government pays the interest on your subsidized student loan as long as you are a student. Unsubsidized loans start charging you interest from the moment you accept them.

In practical terms, this means that your subsidized loans stay the same until you graduate, while unsubsidized ones get bigger every year, normally by about three to five percent. What is more, the interest each year “capitalizes” and is added to the “principal” so you’ll have to pay interest on the interest. It may not seem like much, but over time it can add up.

How Do I Get These Kinds of Student Loans?

Both subsidized and unsubsidized student loans are funded by the federal government. When you fill out a FAFSA form, the government looks at the costs of the university you’ve chosen and compares it to the income and assets you (and, if you’re under 24, your parents) have. Based on those numbers, the government decides how much you are expected to contribute and how much financial need you have.

At that point, the university will offer you a financial aid package, usually including subsidized loans for your financial need and unsubsidized loans for the rest. Though the amount of money you can get in subsidized loans is limited, you often can increase or decrease the amount of unsubsidized loans you accept. Though unsubsidized loans may cost you more in interest, they are still better than private loans which often have much higher interest rates and more restrictive repayment terms.

How Can Knowing Save Money?

Knowing which loans are subsidized and which loans aren’t can save you money. While you are in school, and for a six-month grace period after you graduate, you don’t have to make payments on your student loans. During this time, subsidized loans accumulate no interest, but subsidized ones do. This means that you will owe more at the end, and you’ll be paying interest on a larger sum. So even though you don’t have to, if you make payments on your unsubsidized loans each month while you are in school, you can pay off the interest before it accumulates, keeping the size of the loan small, so you won’t owe more money when you graduate.

What Else Do You Need To Know?

Paying for college is like buying knowledge. But your knowledge is also valuable, and the more you know about financial aid, the more money you can save. Now that you know the difference between subsidized and unsubsidized loans, you can use that knowledge to save money. There are lots of other things you can learn that will put money in your pocket (or reduce the cost of your education).

The Common Sense Guide to Financial Aid: Boy with piggy bank giving thumbs up

You can also get started by downloading our 23-page ebook, The Common Sense Guide to Financial Aid: How to Pay for College without Breaking the Bank. It breaks down financial aid opportunities (and responsibilities) in simple language. And even if you aren’t a student yet, don’t be afraid to get in touch with a Broadview University financial aid manager by calling 877-480-3335. They’re there to help everyone understand financial aid better.

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