What is the difference between subsidized and unsubsidized Stafford loans?
Subsidized loans are awarded based on financial need. You will not be charged any interest before you begin repayment or during authorized periods of deferment. The federal government pays the interest during these periods. You must be enrolled for a minimum of six credit hours in order to qualify for an in-school deferment. An Unsubsidized Stafford loan is not awarded based on the basis of need. You will be charged interest from the time the loan is disbursed until it is paid in full. If you allow the interest to accumulate while you are in school or during periods of nonpayment, it will be capitalized-that is it will be added to the principal amount of your loan and additional interest will be based upon the higher amount.
The Federal Stafford Subsidized Loan is a need-based loan where the Department of Education pays the interest on the loan during periods of deferral and up to 6 months after separation from the College (i.e., graduation, withdrawal, enrolled less than half time). The Federal Stafford Unsubsidized loan is a non-need-based loan. This means the borrower is responsible for the interest on the day the loan is disbursed. The interest can be paid monthly or quarterly or the borrower can allow it to accrue during the in-school period.
With the subsidized Stafford loan, the interest is paid by the government while the student is in school and during the grace period. The interest on the unsubsidized Stafford loan accrues while the student is in school and during the grace period. The student has the option of paying the interest on the unsubsidized Stafford while in school or deferring the interest payment until after graduation which would allow the interest to accumulate, therefore increasing the principal of the loan.
Federal Subsidized Stafford Loans: Need-based loans available to undergraduate and graduate students enrolled at least half-time. The government pays the interest to the lender on behalf of qualified borrowers for as long as students are enrolled at least half-time in a degree-seeking program and for six months thereafter, at which time repayment of the principal and interest must begin. Payment is delayed if the student returns to school. Federal Unsubsidized Stafford Loans: Non-need-based loans available to undergraduate and graduate students enrolled at least half-time. The government does not pay the interest to lenders on behalf of the borrowers. Repayment of the interest is the student’s responsibility from the date the loan is disbursed and may be paid or capitalized (added) to the principal balance of the loan. Repayment of principal does not begin until six months after the student drops below half-time. Payment is delayed if the student returns to school.
Direct Subsidized means that interest, which accrues on a loan while a borrower is in school, grace, or authorized periods of deferment, is paid by the government. Direct Unsubsidized means that the borrower is fully responsible for paying the interest that accrues on the loan. Interest on an Unsubsidized Loan accrues from the date of disbursement and continues throughout the life of the loan. Students will receive quarterly statements reporting interest accrued, with the opportunity to pay the interest to keep it from capitalizing into the principle after graduation. Therefore, it is more beneficial to a borrower to have a Subsidized Loan. However, there are more rigid eligibility requirements to qualify for a Subsidized Loan, and limited amounts for which students can qualify each year and cumulatively.
