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Difference Between Subsidized And Unsubsidized Student Loans

Article on Difference Between Subsidized And Unsubsidized Student Loans

Because of the rising cost of education, more and more students are looking into obtaining student loans to help them with tuition, books, and quite simply, the cost of living. While many of those students do carry a part time job, it isn’t enough even will all the scholarships and grants that may already be available through the federal and state governments. When looking to take out a student loan, there are two very distinct entities and often students question the difference between subsidized and unsubsidized student loans.

Understanding Loans

Before it is possible to understand that difference, it is essential to understand the inner mechanics of a loan. Basically, a lender is letting you borrow money, if you meet specific criteria that will assure them of your ability to pay back the money. However, those lenders are in business to make money, so they charge interest rates every month on the amount of money that has been borrowed, and as yet is not paid back. That’s how they stay in business – by charging you for borrowing that money. This is where the main difference between subsidized and unsubsidized student loans comes into play.

Subsidized Student Loans

A subsidized student loan means that some entity has agreed to pay the interest on that loan as long as certain conditions are met. Understand that no money is being paid toward the principal (balance of money still outstanding that was borrowed) as they will only cover the interest that is accrued. The parties who subsidize these student loans are generally the state of federal governments. Most often the student must stay in school and be enrolled at least half time in order for the subsidized payments on interest to continue being paid. Once the student graduates or leaves school for any reason, or takes less than the required amount of classes, he or she is then responsible for paying not only the loan, but the interest that is accrued.

Unsubsidized Student Loans

An unsubsidized student loan, on the other hand, is much like any other type of loan. The student borrows the money and is responsible for the interest that accrues while the loan is in force. Those payments may not start until the student leaves school, but the amount of money that is payable keeps getting larger and larger over the time that the student is in school. Remember, every time the interest is tacked on to the principal, new interest is calculated on the principal plus interest. This can amount to quite a difference in the amount that was originally borrowed and what you will need to pay back at the end of your studies.

There are other factors which also enter into the equation, but that is simply a basic understanding of the difference between subsidized and unsubsidized student loans. Often lenders allow for a ‘grace period’ once you’ve left school before you need to start making payments to pay back the loan. But in the end, the loan will need to be repaid. If subsidized student loans are available to you, they are always the better option. It might also be worth considering other forms of financial aid such as scholarships, grants or fellowships.