What is the difference between subsidized and unsubsidized loans?

What Is the Difference Between Subsidized & Unsubsidized Student Loans?

• Answer:

  If you're a new college student who plans to seek financial aid, you must familiarize yourself with the various types of loans available. It is not a smart idea to blindly accept any package the college financial aid office offers without first doing your homework. One important issue you should investigate is the difference between subsidized and unsubsidized student loan debt. Subsidized Loans As the case with any standard loan, you have to pay interest charges as a condition of receiving student loan funds to pay for school. When you get a subsidized loan the government covers the interest charges while you're in school --- it's a type of subsidy that benefits you financial in the long run. When you graduate, the loan account starts to bear interest as usual. This loan is the preferred option because you're given some time to finish your studies before interest starts to accrue in your name. Unsubsidized Loans An unsubsidized student loan is the opposite of a subsidized loan. The loan provider starts charging interest right after the loan funds get sent to the school to pay for your tuition and fees. Though you may not have to make any payments while in school, the loan account still accrues interest during that time. When you graduate you have a balance of capitalized interest. Capitalized means that interest gets charged on top of interest. You can make payments on the interest if you wish while in school to minimize the effect of interest capitalization. Considerations Unsubsidized and subsidized student loans apply to students who qualify for federal Stafford loans. Because subsidized loans are the first and most preferable option for a student, unsubsidized loans are offered as a secondary option when the school's financial aid office is putting together the student's package. Stafford loans commonly offer lower interest rates compared with private loans, so in many cases the unsubsidized Stafford loan is preferable to seeking outside financing. Do You Really Need Loans? The average college student graduates with about $20,000 worth of student loan debt, and more for private institutions. Many of these graduates do not find employment that allows them to comfortably afford this debt load. So seek alternatives to taking loans for your education. Get a part-time job to pay your expenses or start an eBay business to make extra money when you're not studying. Check out a less expensive school, including a state or community college. A study by experts at Princeton and the Andrew W. Mellon Foundation found that the income for students who attended an expensive top-rated school are about the same as similar students who attended a lower-profile non-selective school.