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Subsidized Vs. Unsubsidized Student Loans: What to Know

Student loans are a necessity for many students. They allow you to invest in yourself early and get an education that should allow you to pay back the loans when you enter the workforce. Many students wouldn’t be able to attend post-secondary school without them, so they’re a blessing for many low and middle income families. They make dreams of college a reality.

The danger with student loans, however, is that they put the student in a dangerous debt position that is often misunderstood. It’s important to have a grasp of what your debt obligations will be while you’re in school, and what repayment will look like when you graduate.

To begin making sense of your loan, it’s important to determine whether your student loans are subsidized or unsubsidized. The loans are offered on different terms and behave differently while you’re in school — they confer to different obligations when you graduate. Understanding the differences between the two will help you understand your loans and what it takes to pay them off.

Subsidized Student Loans

Simply put, subsidized student loans have better terms. They are easier on you. You’ll typically accrue less debt while you’re in school and owe less money when you graduate. Subsidized student loans are typically awarded to undergraduate students with financial need.

When you apply for subsidized student loans, a determination is made (usually by your school) about the amount of your financial need. This determines the amount you can borrow. The amount of your loan cannot exceed your financial need. Sometimes this process can be confusing, but the basic idea is that your school will look at your finances to figure out how much you need. Sometimes it won’t cover everything you need, but that’s how the system works.

If your loans are subsidized, that also means the U.S. Department of Education pays the interest for a period of time. During this time, you will accrue no interest and your loan will stay the same size. This means if you borrow $6,000 at the beginning of this time, you’ll still owe only $6,000 at the end.

There are three periods in which the Department of Education will pay your interest for you:

  • While you’re in school full-time or half-time
  • During the first six months after you leave school or graduate (during your “grace period”)
  • While your loan is deferred (if your loan payments are postponed, this is called “deferment”)


Most loans begin accruing interest as soon as you receive them. Receiving a temporarily interest-free loan is, financially speaking, a great deal. It eases the burden on students who graduate from college and must start their careers while paying off their loans.

Unsubsidized Student Loans

An unsubsidized student loan is a loan given to you on terms not as favorable as a subsidized loan. It performs like a more traditional loan, with interest beginning to accrue as soon as the funds are dispersed.

The good news is that unsubsidized student loans have no financial need requirements. These loans are available to undergraduate and graduate students with no requirement to demonstrate any sort of extenuating circumstances.

Your school determines how much you can borrow by looking at your attendance and other financial aid programs. Once the amount is determined and the funds are sent to your account — or applied to tuition or other costs — you begin paying interest immediately.

You have the option of not paying interest while you’re in school, but the interest will accrue anyway and be added to the principal of your loan. You can choose to pay the interest while you’re completing your degree and have less money to pay back when you’re out of school. Or you can choose to wait and pay the original principal, plus interest, when you graduate.

Understanding Your Debt

No matter what your situation, it’s important to know any loan inside and out before signing the papers. Understand how interest works and what your rate is likely going to be over the lifetime of the loan. Determine how long it should take you to repay the loan and how much you’ll owe on a monthly basis. Talk to your Financial Aid Advisor for more in-depth information about your loan options. The more you know about your loan, the more prepared you’ll be for life after school. You can then focus on making the most of your investment in yourself and your education.

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