Difference Between Subsidized and Unsubsidized Loans
Being able to go through college is perhaps one of the many dreams of every American student. For them, it's at least a notch closer to having a bright future and living the American dream. However, the mounting costs involved in going to college can be the big stumbling block lying between a student and his or her ambitions. Recognizing this and coupled by its effort to have a well-educated population and workforce, the federal government of the United States is setting aside funds in the form of federal student aids to help many students go through college. These student aids typically come in the form of federal study-work programs, federal grants, and federal loans.
Federal Grants and Loans
Grants are not loans and are typically not repaid by the students who received such. They’re provided by the federal government to students showing the most need for it and as such, not every student will be eligible for it. Such being the case, most students wanting to go to college often turn to federal-sponsored loans. This is where the terms subsidized and unsubsidized loans come into the picture.
The federal government, under its Federal Student Aid program, offers two types of student loans for this purpose: the Perkins Loans and the Stafford Loans.
The Perkins Loan, though, is a form of a federal government-sponsored subsidized loan with very low interest rates and is only available to students who demonstrate the most need for it. Furthermore, funds allotted by the federal government for a Perkins Loan is only limited, and therefore, not every student will be eligible for it. On the other hand, a Stafford Loan, also called "Federal Direct Stafford Loan", is a federal government-sponsored loan that is more accessible to students and is made available in two forms: subsidized and unsubsidized. In essence, when we hear people talk about subsidized and unsubsidized loans, they’re almost always talking about Stafford Loans. So how are these two types of Stafford loans different from each other?
Main Difference Between Subsidized and Unsubsidized Loans
The main difference between these two lies on the payment of the loan’s interest. In a subsidized loan, any interest on the principal amount is shouldered or “paid” by the federal government. On the other hand, in an unsubsidized loan, it’s the student who is obligated to pay for the loan’s interest. Looking at it that way, it may seem to appear that opting for a subsidized loan is the way to go; however, there are underlying factors that make it not possible for every student to avail of the subsidized Stafford loan. Available federal funds for subsidized Stafford loans are limited which is why it’s only extended to students classified as really “needy”. However, for those students who aren’t eligible for it, they can still avail of the unsubsidized Stafford loan through the FAFSA (Free Application for Federal Student Aid), although the process of availing such could be quite cumbersome and circuitous. But even if that is so, it’s still much better than availing of private loans because of the hereunder advantages:
- No credit check
- No guarantee or collateral required
- Interest rates are much lower than that of private loans
- Interest rates are fixed while private loans fluctuate annually