Which Is Better: A Subsidized Federal Loan Or An Unsubsidized One?

Flickr user David Fant

Both subsidized and unsubsidized federal loans are offered by the federal government and are similar in many ways. You have to file the FAFSA to get either of these loans, and the schools you have applied to determine the amount you can borrow. Both loans also have the same fees, interest rates, and repayment terms, and the interest on both loans starts accruing as soon the loan amount is disbursed.

Because of these similarities many borrowers often make the mistake of thinking they are the same. However, there is one big difference between the two loans and this one difference can have a huge impact on your overall debt.

Subsidized Loans vs Unsubsidized Loans

When you take a subsidized federal loan, the federal government pays the interest on the loan from the time it is disbursed till 6 months after you graduate (called the grace period) as long as you remain enrolled in school with at least a half-time status.

This does not happen with unsubsidized federal loans. With an unsubsidized loan, you are responsible for paying all the interest that accrues on your loan. The federal government does not pay off the interest. So although you will only start making payments after your grace period, the interest starts accruing from the day the money is disbursed to you.

However, since unsubsidized loans are not based on demonstrated financial need (unlike subsidized loans, which are), the amount you can take out with an unsubsidized loan is much higher than its counterpart. Additionally, unsubsidized loans are available to both graduate and undergraduate students, while subsidized loans are only for undergrads.

So Which Should I Pick?

Generally speaking, undergraduate students should look at pursuing a subsidized loan first. But with proper financial planning, an unsubsidized loan isn’t as terrible as you might think.

Use College Raptor’s free Student Loan Finder to compare lenders and interest rates side by side!

College Raptor Staff

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