The difference between these two types of student loans
If you or a family member is in the process of applying to schools and seeking information about the various ways to cover tuition and the associated costs, you may have already learned that you can choose between applying for loans that are either subsidized or unsubsidized.
There are key differences between these two types of loans that you should learn to make sure you choose the type that better suits your financial needs.
One of the things that make the loan application process slightly more confusing is that different people or organizations may use different names when referring to the same loan. Direct Subsidized Loans and Direct Unsubsidized Loans are sometimes called Stafford Loans or Direct Stafford Loans, respectively, so if you’ve heard those terms, you should be aware that they are the same and not two additional loans out of four different types being discussed. Regardless of what these loans are called, when trying to figure out which type of loan is which, the most important criterion to look at is whether the loan is subsidized or unsubsidized.
Both loan types are offered by the U.S. Department of Education to eligible students who attend participating schools. They can be used at four-year colleges and universities, community colleges, and trade, technical and career schools.
Qualifying for either type of loan requires the student to be enrolled at least half time at a school participating in the Direct Loan Program. Typically, the student’s chosen program must be one leading to a degree or certificate.
Direct Subsidized Loans offer students slightly better terms. This is because they are intended to go to students with financial need.
The website run by Federal Student Aid, an office of the Department of Education, defines financial need as “[t]he difference between the cost of attendance [COA] at a school and your Expected Family Contribution [EFC],” and states, “While COA varies from school to school, your EFC does not change based on the school you attend.”
Although your EFC will not change depending on your chosen school, your school will be responsible for determining the amount that you can borrow. That amount may never exceed your financial need, however.
The biggest advantage of a Direct Subsidized Loan is that the Department of Education pays the interest on the loan while the student is still in school at least half time. The federal government will also pay the interest on the loan if the student has postponed his or her loan payments with an authorized loan deferral. Furthermore, the six months following the student’s graduation are considered a “grace period,” during which time the federal government continues to pay the loan interest. This is intended to make it easier for students to make payments while searching for a job.
Although the party responsible for paying the loan interest differs, the interest rate itself does not depend on the loan type.
“As of 2013, interest rates charged for Federal Direct Loans began to be tied to the 10-year Treasury note, with an additional margin added on to cover expenses,” states Mark P. Cussen, CFP, CMFC, AFC, in an article for Investopedia. “They do not depend on the borrower’s credit score.”
In order to qualify for a Direct Subsidized Loan, the income level of the student’s family must not be above certain levels. The exact criteria that define low family income and sufficient financial need are detailed in the Free Application for Federal Student Aid (FAFSA). More information about the regulations and processes of applying for student aid with FAFSA can be found at https://fafsa.ed.gov.
While Direct Unsubsidized Loans don’t have an income requirement, the student is responsible for the interest accrued during all periods. One advantage of Direct Unsubsidized Loans is that they are available to graduate students, which isn’t the case with Direct Subsidized Loans. A further advantage is that it is possible to take out more money with a Direct Unsubsidized Loan, so students with very large educational costs to cover may find it necessary to use a loan that is unsubsidized.
The cost of education is rising at an alarming pace, but thankfully there are many financial tools, including Direct Subsidized and Direct Unsubsidized loans, to help students and their families cover it. To delve more deeply into the details of these loans and explore the wealth of information available online for students and their families in the application process, visit https://studentaid.ed.gov/sa/.
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