The U.S. Department of Education’s Stafford student loan program has both subsidized and unsubsidized loans, and knowing the difference between the two is very important. These differences affect eligibility, use (undergraduate or graduate school), and interest accumulation.
Eligibility. Subsidized loans are available only to those in financial need. This means that the school determines the amount you can borrow, and it cannot exceed your need.
In general, financial need is the difference between the cost of attendance and your Expected Family Contribution. With unsubsidized loans, you do not have to demonstrate need.
Use. Subsidized loans are only available for undergraduate school, while unsubsidized loans can be used by graduate students as well.
Interest Accumulation. This is where the names of the two loan types comes into play. With subsidized loans, the U.S. Department of Education pays the interest during the following periods, while with unsubsidized loans, you do:
- While you are in school at least half time
- For the first six months after you leave the school or graduate (the grace period)
- During a period of deferment of loan payments after you leave/graduate from the school
With an unsubsidized loan, the interest accumulates during these periods, and then capitalizes (is added to the loan principal) after the period is over.
As for the grace period, the interest that accumulates during the grace period on a loan that disbursed between July 1, 2012, and July 1, 2014, must be paid or it will capitalize.
If you are looking for more information about federal financial aid for college, then download my free book, Applying for Federal Financial Aid: The Definitive Guide for Students and Parents.
For more information about what happens after you graduate, get my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.
You can also access the latest news on student loans, get answers to Frequently Asked Questions, and read articles in my Library. Continue to educate yourself as you go through the process of making smart decisions about college financing!