Do you need a student loan to help you cover tuition costs? About 70% of students do, and it can take most people decades to deal with the balance in repayment plans.
How can you shorten that time?
Knowing the difference between subsidized vs. unsubsidized student loans could save you thousands. And that could mean the difference between relaxing into adulthood and delaying everything to pay back your debt.
Subsidized vs. Unsubsidized Student Loans: Key Differences
All student loans start with a basic premise. You need money to pay for books, fees, and tuition. Someone covers those costs for you through loans disbursed, and in return, you pay something for their generosity.
The only difference between subsidized vs. unsubsidized loans is interest. The interest rate may be the same, but it’s calculated very differently in these two programs. Annual loan limits also differ.
Experts explain interest payments this way:
- Subsidized student loans: You won’t pay interest on these loans as long as you’re attending classes at least half-time. If you take advantage of deferment programs after graduation (due to financial challenges, illness, or something similar), you also won’t see costs due to interest rise.
These are always federal direct loans for undergraduates. It’s the federal government that forgives your interest fees. - Unsubsidized student loans: This type of loan will accrue interest as soon as the first disbursement goes out. In most cases, you’re not required to pay those interest fees while you’re in school, but you’ll see the loan balance increase as interest mounts.
There are unsubsidized federal student loans, but they can also originate with private parties, like banks and credit unions. Both undergraduate and graduate students can take these loans out.
There are caps on unsubsidized student loan borrowing amounts. First-year students can only take out loan amounts of $3,500 of this type, per the U.S. Department of Education. But these same students can borrow $6,000 more in unsubsidized loans if they have independent status.
Which Student Loan Type Is Best for You?
Choosing the right student loan is one of the most important decisions you can make. It will have repercussions on your finances for years to come. And when you’re comparing subsidized vs. unsubsidized loans, the choice is pretty clear.
Unsubsidized loans can save you a lot of money on your undergraduate degree. The U.S. Department of Education says that these loans come with better terms, so they’re ideal for students with demonstrated financial need. You’ll pay less for them, and you’ll have more time after graduation to find a job that helps you pay down your bill.
But you may not always qualify for a loan like this.
To determine eligibility, officials come up with a ratio between what you can pay and how much the school charges in tuition. If the numbers are right, you can get the loan.
Sometimes, the steps you take to save on your education can disqualify you for an unsubsidized student loan.
Consider community college. Tuition at these institutions is remarkably lower than the fees charged by private schools. In some states, like California, attending a school like this is close to free.
If you choose a low-cost option, you might not qualify for an unsubsidized loan. But you may need help to pay for your schooling. Your books could run into the hundreds, for example, and a loan could mean the difference between getting by and failing out.
Unsubsidized student loans have no eligibility requirements. Federal student loans are open to everyone who needs them, including people with a poor credit history. And some banks and credit unions offer student loan products that can save you a lot of money.
It’s worth reiterating that subsidized student loans aren’t open to graduate students. If you already have your undergraduate degree and you need to borrow money to keep heading to school, your only option is an unsubsidized loan.
Which Is Best for the Economy?
Student loan choices seem personal. You’re the one who signs the documents, accepts the risks, and agrees to pay back the balance. But the choices we make as private individuals can impact the economy as a whole. And right now, there’s a fierce debate going on concerning subsidized vs. unsubsidized loans. 
People who are opposed to unsubsidized loans typically say these products:
- Are expensive. Interest fees that should flow into national coffers are forgiven. Some want that money where it belongs.
- Discriminate. Loan eligibility is determined by your current financial health, not your future earning power. That doesn’t sit right with some critics.
- Encourage borrowing. Delaying interest payments can prompt some people to ignore them, even as they grow every day. Making the fees immediate could hold borrowers accountable.
Those who appreciate these types of loans might argue these points and highlight the poor decisions that some students make due to student loan debt. For example, researchers say that close to half of students who graduate with debt put off home ownership. They don’t believe they qualify for a mortgage or can keep up with the payments, so they continue to rent. That can have a ripple effect on:
- Construction workers. When people aren’t buying new homes, no one needs to build them.
- Home furnishing shops. Apartments need appliances and couches too. But renters can share with others, and they’re often happy to accept secondhand goods.
- Teachers and childcare workers. Without a home, some young couples also put off having children. That could keep class sizes down and put educators out of work.
How Can You Decide?
If you want to take out a subsidized product, you’ll need to qualify.
To do that, you will need to:
- Visit your school’s financial aid office. Mention that you’re interested in a federal loan and you need help with your application.
- Be honest. You’ll have to provide intimate details of your financial health. Your parents might also need to disclose their wealth.
- Watch and wait. If you’re approved, you’ll be told by the U.S. Department of Education. If you are not approved, the department might tell you about unsubsidized products that you qualify for.
- Make your decision. Think about where you’re planning to go to school and the price tag attached. If you qualify for a subsidized student loan and you love your school, this could be the perfect fit. Otherwise, you’ll need to accept your federal unsubsidized loan or investigate your private loan options. You could even look for a new school.
Remember that you have options. Take your time, consider them all, and think hard about your financial future.
