Pros And Cons Of Direct Subsidized Loans
The core benefit of Direct Subsidized Loans is how interest is handled. With the Department of Education covering your interest charges during certain periods, less interest will accrue and your total repayment cost will be lower.
Direct Subsidized Loans are a good option for undergraduates because they have low interest rates and are eligible for income-driven repayment plans. Theyre also qualifying loans for Public Service Loan Forgiveness and Teacher Loan Forgiveness, so borrowers could qualify for loan forgiveness if they work for a qualifying non-profit, government agency, or school.
However, Direct Subsidized Loans arent available to everyone. Only students with exceptional financial needs will qualify for Subsidized Loans. Even if you qualify, you will likely need other loans to pay for the full cost of your tuition because the annual and aggregate limits on Subsidized Loans are quite low.
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What is a subsidized loan?
A subsidized loan is a type of . With a subsidized direct loan, the bank, or the government is paying the interest for you while youre in school , during your post-graduation grace period, and if you need a loan deferment.
Youre effectively getting your responsibility to pay that interest back waived with a subsidized loan during those time periods. Once you start repayment, the government stops paying on that interest, and your repayment amount includes the original amount of the loan, and the interest, accruing from that moment.
What is an unsubsidized loan?
Another type of federal loan is an unsubsidized loan. With a federal unsubsidized loan, you are responsible for the interest from the moment the loan money is disbursed into your account. Theres no help on the interest youre responsible for the whole amount.
When you start paying back your unsubsidized loans, youre paying on the original amount and the interest that accrued since the unsubsidized student loan was paid to you. This can, of course, add up to thousands of dollars more to repay over the life of the loan.
So why would anyone ever take out an unsubsidized loan?
The FAFSA is key
Subsidized Vs Unsubsidized Loans: Key Differences
Most student borrowers fund their education with low-interest loans called direct loans because you borrow them directly from the U.S. Department of Education .
average return of 397%
Those loans are either subsidized or unsubsidized. Subsidized loans are for students with financial need, whereas financial need doesnt factor into unsubsidized loans.
But thats not the only difference. And a closer examination of those differences reveals why you should always max out your subsidized loans before taking on unsubsidized ones.
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Definition And Example Of A Subsidized Loan
When a lender applies a subsidy to the interest portion of a loan on behalf of the borrower, it’s defined as a subsidized loan. The lender generally pays the interest charges on the loan during certain periods. The subsidy has the effect of reducing the borrower’s periodic loan payment in periods during which it is applied, thereby making loan repayment more manageable, lowering the total cost of the loan, and saving the borrower money.
Governmental agencies at the federal, state, and local levels, as well as non-profits, may offer subsidized loans, but federal agencies most commonly extend subsidized loans. When they do, they tend to be reserved for low-income borrowers, meaning that borrowers often have to demonstrate financial need to obtain them. One common example of subsidized loans is a federal student loan through the Department of Education.
Not all federal student loans are subsidized. A financial aid package may include a combination of both subsidized and unsubsidized loans.
Are There Fees For A Subsidized Loan
Federal subsidized loans do come with some fees. You’ll pay a loan fee based on a percentage of the loan amount, which is deducted from each payout. According to the most recent data, loans disbursed on or after October 1, 2019, and before October 1, 2020, had a loan fee of 1.059% .
Just like with any loan, you’ll also pay interest in exchange for borrowing money. The interest rate on subsidized loans disbursed on or after July 1, 2019, and before July 1, 2020, is 4.53%.
Interest Accrues Even During Periods Of Non
Most student loans, especially federal student loans, dont require payments while the student is enrolled in school on at least a half-time basis and during a grace period after enrollment ends.
However, interest starts accruing for many loans as soon as the money is disbursed, even before you begin making payments.
Interest continues to accrue on a student loan even when the student loan borrower isnt making payments on the loan. So, if the student loan borrower is in a deferment or forbearance interest can still rack up.
Interest continues to be charged even under income-driven repayment plans if you have an eligible loan in that program. Likewise, if the borrower is late with a payment or in default, interest will continue to be charged.
How Do You Apply For A Federal Student Loan
You apply for a subsidized or unsubsidized federal student loan the same way: Simply fill out the Free Application for Federal Student Aid .
Once the government receives your application, it forwards your information to the colleges or universities that you listed on your FAFSA.
The schools that decide to accept you will send you an acceptance letter and a financial aid package. The financial aid package will generally include information about federal and state grants, as well as your eligibility for federal subsidized and unsubsidized student loans.
Lets pause here for a moment to clarify two things that people often get confused about:
- Even though the FAFSA is a government application, your financial aid package will come from the financial aid offices of colleges that you have applied to. You will not get an award letter from the federal government.
- You may get more or less federal financial aid depending on which school you attend.
After taking into account the free money we mentioned above, its generally best to accept all subsidized loan dollars offered to you, followed by federal unsubsidized loans and then private loans, as necessary.
Pros And Cons Of Subsidized Loans
Subsidized loans come with some great benefits:
- Because the federal government pays the interest during the periods noted above, subsidized loans will save you money.
- They offer flexible repayment options you won’t find with private loans.
- You’ll pay lower interest rates on these loans than on comparable private student loans.
But they also have some drawbacks you should be aware of:
- You’re limited in how much you can borrow in subsidized loans each year and in total. Your school determines your maximum loan amount based on federal limits , your financial need and your year in school. If you need more than the maximum amount, you can take out unsubsidized or private loans to cover the difference.
- They’re only available for undergrads, so graduate students have to look elsewhere.
- Financial need must be demonstrated to qualify, so you may not be eligible if your parents’ income is too high.
Repaying Federal Direct Loans
Youll begin repaying your loans six months after you graduate or drop below half-time status. First, youll be asked to complete exit counseling, which will provide you with information on repaying your loans. Well send you email with the details when its time for you to go through exit counseling.
Applying For A Stafford Loan
Apply for a Stafford loan by completing a Free Application for Federal Student Aid form. This application is also used to determine if youll receive a Perkins loan, another type of federal student loan.
If you are not eligible for any federal student aid, look into private education loans to finance your education. No matter what your financial situation or credit history, you should be able to find a loan to help you pay for your own or your childs higher education.
How Do You Repay Subsidized Student Loans
You must repay federal subsidized loans after you leave school or drop below half-time enrollment. First, youll have a six-month grace period in which you dont have to make payments allowing you time to get established in a job and set a budget. During this time, your loan servicer will give you instructions on how to make your payments and let you know when your first payment is due.
Your loan servicer can also help you determine which repayment plan is right for you. The default is the Standard Repayment Plan, in which you pay off your loan with regular, fixed monthly payments over 10 years. All borrowers are eligible for this plan.
Other repayment plans you may consider include:
Who Qualifies For Subsidized Student Loans
To receive subsidized student loans, you must first be eligible for federal student aid. To meet those criteria, you must:
- Have a high school diploma or equivalent, or complete a high school education via homeschool
- Be a U.S. citizen, U.S. national, U.S. permanent resident, or fall under a limited number of immigrant categories
- Have a valid Social Security number, in most cases
But not all college attendees who are able to receive federal student aid will qualify for subsidized student loans. In order to be eligible, you must also:
- Demonstrate financial need
- Enroll in a degree or certificate program at least half-time
- Complete entrance counseling
If you arent eligible for federal student aid, you can compare private student loan rates using Credible, and it wont affect your credit score.
What Do Subsidized And Unsubsidized Mean
There are two types of Federal Direct Loans: subsidized and unsubsidized.
Subsidized loans
Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. If you get a Direct Subsidized Loan, the U.S. Department of Education pays any interest that accrues while youre enrolled at least half time.
Unsubsidized loans
Direct Unsubsidized Loans are available to both undergraduate and graduate students. You do not need to show financial need to qualify. Youre responsible for paying all interest on the loan.
How To Earn Money To Pay Down Unsubsidized Loans
We know finding flexible work isnt always easy. The following is a list of some common ways students can make a little extra money to start paying down unsubsidized student loans:
- Work-study. Students receiving financial aid may qualify for flexible on-campus employment in dorms, dining halls, or student unions.
- Tutoring. If you excel in math, science, Spanish, or any other subject, consider tutoring other students in your spare time. Youll earn some extra cash and make some new friends.
- Become a tour guide. If you love your school, why not convince other students to attend? Plus, youll get essential public speaking skills.
- Ride-sharing. If you have a car, consider driving for Lyft or Uber every once in a while. You can work more in slow periods and ease off during finals.
- Research assistant. Teaming up with a professor in your field as a research assistant can help you earn a little money on the side while developing your skills and expertise.
- Internships. Getting a summer internship is an excellent way to start making connections with potential employers and build your resume.
If you can work even a few hours per week during the school year, youll be able to start paying down interest on your unsubsidized loans. Youll be grateful when you become debt-free faster than your peers.
Why Should You Pay Interest On Unsubsidized Loans While In School
If you have a $100,000 loan at 6.6% interest, youll need to pay $6,600 worth of interest each year. If you successfully pay off the interest every year, youll finish college with $100,000 in debt the amount you originally borrowed.
If you pay $1,000 each month, starting six months after graduating, you will finish paying off your student loans in just over 12 years . Now, thats still about two years longer than if you had subsidized loans. However, its a full eight years earlier than if you hadnt paid interest while in school.
In this example, if you graduate college when youre 22, paying down interest while in school is the difference between being debt-free in your early 30s or your 40s. Thats almost a decade of less stress and greater financial flexibility.
Direct Loans And Federal Family Education Loan Program Loans
Direct Loans and Federal Family Education Loan Program Loans offer quite a few repayment plans.
The Standard Repayment Plan has fixed payments to ensure a loan is paid off within 10 years. Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, PLUS loans, and all Consolidation Loans are eligible for this plan, where borrowers will pay less over time than those who repay their loans with other plans.
The Graduated Repayment Plan has lower payments at first, with payments typically increasing every two years, allowing you to pay off your loans within 10 years. However, it will cost more than the Standard Plan over time. Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, PLUS loans, and all Consolidation Loans are eligible for this plan.
The Extended Repayment Plan can be fixed or graduated and ensures loans are paid off within 25 years. Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, PLUS loans, and all Consolidation Loans are eligible for this plan however, you will pay more over time than under the Standard Plan. Monthly payments will be less than under the 10-year Standard or Graduated Repayment plans, but FFEL and Direct Loan borrowers must have more than $30,000 in outstanding loans to be eligible.
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To Receive Your Subsidized Or Unsubsidized Loan:
How To Apply For An Idr Plan
Like most programs that provide financial relief, youll need to apply to get an IDR plan.
Borrowers can apply through Federal Student Aid for free. Private companies can help, but they may charge a fee.
After your initial application, your work isnt done. Participants are required to recertify every year and resubmit updated information about their income and family. If you dont, you could lose your benefits, and your payments could go back to the amount you owed under the 10-year repayment schedule, potentially costing you a lot of money.
To know when its time to recertify, set a reminder in your calendar or smartphone.
You Should Take Out Unsubsidized Loans If
After youve maxed out available subsidized student loans , turn to unsubsidized loans if you:
- Need to Borrow Above the Subsidized Loan Cap. If you cant meet the total cost of attendance with your savings and financial aid including scholarships, grants, and subsidized student loans turn to unsubsidized federal direct loans before higher-interest PLUS loans or private student loans.
- Cant Demonstrate Financial Need. Subsidized student loans are for borrowers with financial need. If you cant demonstrate it on your FAFSA, you wont qualify for subsidized loans.
- Are Borrowing for Graduate or Professional School. Subsidized federal student loans are unavailable to graduate and professional students, no matter your financial situation.
What To Do After Youve Exhausted Your Federal Loan Options
Depending on the cost of attendance of your chosen school, federal student loans may not cover all your expenses. If this is the case, you may turn to private student loans to fill in the gap. Private lenders including banks, credit unions, and online lenders offer private student loans.
You may need to meet credit score requirements or have a cosigner to help you qualify for these loans. Private student loans typically have less generous repayment plan options, though interest rates may be lower depending on your financial situation.
Credible makes it easy to compare private student loan rates from various lenders in minutes.
Direct Subsidized And Unsubsidized Loan Procedures
Direct Subsidized and/or Unsubsidized loans are offered up to maximum eligibility for students grade level as determined by the Registrar. The UTC Financial Aid Notification is sent to the students UTC email account.
Students then access their financial aid award in MyMocsNet. Students must accept, reduce or decline the loans through their MyMocsNet account. Students borrowing Direct Loans for the first time at UTC must complete Entrance Loan Counseling and a Master Promissory Note prior to receiving their first loan disbursement at UTC.
The Direct Subsidized and Unsubsidized Loans have origination fees that are deducted proportionately from each loan disbursement the student receives. This means the money you receive will be less than the amount you actually borrow. You are responsible for repaying the entire amount borrowed and not just the amount received.
Graduate students are not eligible to receive Direct Subsidized Loans.
Loan Limits for the academic year are:Dependent Students
When Does Interest Start For Private Student Loans
Private student loans are loans offered by banks, credit unions and other providers to help students with education expenses. As with federal student loans, private student loan interest typically begins accruing when you receive the loan funds.
The terms you receive on a private student loan will depend on the lender, and the interest rate can be fixed or variable. A fixed rate stays the same for the entire loan, while a variable interest rate can change over time.
Many private loans require you to begin making payments while you are in school, but others may allow you to defer payments while you are enrolled. Check your loan agreement or call the lender directly to learn more about how they charge interest and when payment is required.
