What is the Difference Between Subsidized and Unsubsidized Loan?

The main difference between subsidized and unsubsidized loans lies in the interest accrual:

• Subsidized Loans: These loans are for undergraduate students with financial need. The federal government pays the interest while the student is in school at least half-time or during deferment periods. The interest rate is fixed at 4.99% for undergraduates.
• Unsubsidized Loans: These loans are available to both undergraduate and graduate students, regardless of financial need. Interest starts accruing as soon as the loan is disbursed. Students can choose to pay the interest or allow it to accrue and be capitalized (added to the principal amount of the loan). The interest rate is fixed at 4.99% for undergraduates and 6.54% for graduate and professional borrowers.

In summary, subsidized loans are better for borrowers who can demonstrate financial need, as the federal government covers the interest during specific periods. Unsubsidized loans are suitable for students who do not qualify for subsidized loans or need additional funding. It is generally recommended to exhaust subsidized loans before taking out unsubsidized loans. Both types of loans are part of the federal Direct Loan Program, and to apply for them, students need to submit the Free Application for Federal Student Aid (FAFSA).

Comparative Table: Subsidized vs Unsubsidized Loan

The main difference between subsidized and unsubsidized loans is that subsidized loans are based on the borrower's financial needs, while unsubsidized loans are not. Here is a table outlining the key differences between these two types of loans:

Both subsidized and unsubsidized loans offer numerous benefits, including flexible repayment options, low interest rates, the option to consolidate loans, and forbearance and deferment programs. They also have the same loan fees, which can be up to 1.059%.