What Are Subsidized and Unsubsidized Loans?

Federal student loan borrowers may qualify for two types of loans: subsidized and unsubsidized. While the Department of Education (ED) temporarily pays the interest on subsidized loans, unsubsidized loans accrue interest from day one.

Federal student loans: Who qualifies?

To qualify for either type of federal student loan, you must:

  • Be a U.S. citizen or eligible non-citizen with a Social Security Number
  • Have a high school diploma or equivalent
  • Enroll at least half-time at an eligible university, college, trade school or program
  • Make satisfactory progress toward your degree
  • Not have defaulted on an existing federal loan To apply for federal loans, you’ll have to fill out the Free Application for Federal Student Aid (FAFSA) first. The FAFSA helps determine your financial need and aid eligibility based on your income, assets and cost of attendance.

What are subsidized loans?

Subsidized loans are federal student loans available to undergraduate students who demonstrate financial need. They’re subsidized by the Department of Education (ED), meaning the ED pays interest:

  • While you’re enrolled in an eligible educational program at least half-time
  • During your six-month grace period after leaving school
  • During qualifying deferment periods Since this interest doesn’t accumulate over time, subsidized loans cost less than unsubsidized loans.

What are unsubsidized loans?

Unsubsidized loans are federal loans available to undergraduate, graduate and professional students regardless of financial need. Eligibility is based on your cost of attendance minus outside financial aid (e.g., grants, scholarships). Unlike subsidized loans, the ED does not pay interest on unsubsidized loans. They start accruing interest when your loan is disbursed and don’t stop until it’s paid off. If you don’t make interest payments while in school, it’s added to your principal (capitalized). And though you still have a six-month grace period of no payments after leaving school, your interest accrues then, too.

The difference between subsidized and unsubsidized loans Screen Shot 2023-08-16 at 2.53.32 PM.png

Invest to offset student debt

If you have to go into debt to get through school, subsidized loans are one of the cheapest options. But for students who don’t qualify, unsubsidized loans may still be cheaper than private, higher-rate loans.
Still, if you don’t have to borrow your way through school, you shouldn’t. (Even if it means eating more Ramen than you’re used to.)

However, we believe no one should have to go into debt to better their lives. By investing early and often – and with the help of artificial intelligence – you can start building a healthy nest egg for your child’s education. (Or even your own.)

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