Subsidized vs. Unsubsidized Student Loans: Which Is for You?

06/06/2015 01:42 pm ET | Updated Jun 06, 2016

As an independent, transparent marketplace for student loans, Credible helps borrowers understand all of their student loan options.

One of the most important concepts affecting your repayment plan is subsidized vs. unsubsidized loans. It is important when you’re taking out student loans or are in repayment to understand which each are.

Subsidized Student Loans

The federal government offers subsidized loans based on the student’s financial need when applying for aid through the FAFSA. The key component of a subsidized student loan (and the biggest benefit) is that the U.S. Department of Education pays for any interest accrued while you are in school. To receive this benefit, you must be enrolled at least halftime. You’ll also get a six-month grace period after graduation, meaning that any interest that accrues during your college career and six months afterward, is completely paid for. When the grace period ends, though, you are required to make monthly payments of principal and interest.

Unfortunately, subsidized loans are only available to undergraduate students. You can also take advantage of this benefit if you choose to defer your student loans, however if you wish to put your loans in forbearance, interest will still accrue on a subsidized loans. 

Unsubsidized Student Loans

Unsubsidized student loans, on the other hand, begin accruing interest from the date of your first loan disbursement, though you’re not required to pay that interest until you finish school. When you graduate, the amount of money that accrued during your education is simply added to the principal loan amount and you begin paying off that new amount.

One benefit to taking out an unsubsidized loan is that you are not required to demonstrate financial need so the amount you can take out is much higher than a subsidized student loan. Additionally, unsubsidized federal student loans are available for both undergraduate and graduate students.

Subsidized vs. Unsubsidized: Which is for you?

For undergraduate studies, both types of federal loans currently carry the same fixed interest rate, so it is generally a good idea to take out a subsidized loan before taking on additional debt with an unsubsidized loan. If you are planning on going back to school, subsidized loans can help save a lot of money in deferment since interest will not accrue. If you do not have a choice because of your lack of financial need, your next option is to choose between a federal unsubsidized and a private loan. Although federal loans generally have lower fixed interest rates, private loans also offer very low variable interest rates. 

Check out Credible to compare your refinancing options or private student loan options. 

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