What is the difference between a subsidized and an unsubsidized loan?
A. If you receive a subsidized loan, the federal government pays the interest for you while you are in school, during your grace period and during some authorized periods of deferment after you leave school. You are responsible for the interest on an unsubsidized loan, but may be able to defer those payments until after school, during your grace period and during some authorized periods of deferment after you leave school. When you defer payments, interest will accrue and will be added to your loan; therefore, deferring payments for an extended period of time may substantially increase your loan balance. It is in your best interest to make payments – even while attending school and before entering repayment – that at least cover your accrued interest in order to avoid increases in your loan balance.
A subsidized loan is awarded on the basis of financial need. You won’t be charged any interest before you begin repayment or during authorized periods of deferment). The federal government “subsidizes” the interest during these periods. An unsubsidized loan is not awarded on the basis of need. You’ll be charged interest from the time the loan is disbursed until it is paid in full. If you allow the interest to accrue (accumulate) while you are in school or during other periods of nonpayment, it will be capitalized—that is, the interest will be added to the principal amount of your loan, and additional interest will be based on that higher amount. If your interest is capitalized, it will increase the amount you have to repay. You can choose to pay the interest as it accumulates; if so, you’ll repay less in the long run.
The interest on a subsidized loan is deferred while the student is in school and must be repaid six months after graduation. Payments on the loan must begin immediately if the student is enrolled for fewer than 6 credits or if he or she has stopped attending school. Unlike the subsidized loan, the unsubsidized loan carries interest throughout a students’ enrollment in college and during the deferment period.
Related Questions
- What if I have exhausted my annual Federal Direct Subsidized/Unsubsidized Loan eligibility and I still have not reached the cost of attendance? How do I secure additional loans?
- What is the main difference between a Subsidized and Unsubsidized Direct Loan?
- What is the difference between a subsidized loan and unsubsidized loan?
