Understanding Subsidized vs. Unsubsidized Federal Direct Student Loans
There are many factors you should consider when choosing a college, among the most important of which is cost. Tuition rates and other charges are often a deciding factor in where students end up. However, resources like financial aid, scholarships, and financing options can help make an expensive college much more manageable for your family.
Student loans are a popular way to provide financial flexibility—you receive a lump sum to pay for your education now, and are able to pay off that debt over time. Among the student loan programs out there, Federal Direct loans, which are provided by the US government, stand out as particularly good options for qualified students.
Federal Direct student loans come in two types: subsidized and unsubsidized. In this post, we’ll go over what you need to know about each type of loan and how to use this knowledge to craft a student loan package that fits your needs.
How Federal Direct Student Loans Work: The Basics
Through the Federal Direct student loan program, qualified undergraduates can borrow money directly from the federal government to help pay for college. To qualify, you must be a US citizen, or fit into a particular category of eligible noncitizens, and be enrolled at least half-time at a participating college. There are also other eligibility criteria, which you can find on the Federal Student Aid website.
In order to take out Federal Direct loans, you’ll first have to fill out the FAFSA in order to determine which loans you’re eligible for. Unlike most private student loans, Federal Direct loans don’t require a credit check, a cosigner, or a specific application form.
There are yearly and total limits for how much you can take out in Federal Direct loans to pay for college. Currently, the limits stand at $5,500 in your first year of college, $6,500 in your second year, $7,500 in your third or subsequent years, and $31,000 overall. Since these loans are intended for educational expenses, you also can’t take out more in loans than your estimated cost of attendance.
After you leave school, you’ll get a six-month grace period during which you don’t need to make payments. Then you’ll need to pay back the money you borrowed, along with the interest and fees charged by the federal government. All Federal Direct loans have fixed interest rates, meaning your interest rate will stay the same for the entire lifespan of your loan.
With Federal Direct loans, you’ll be able to choose among a number of different payment plans—for instance, you might pick one in which the payments start out smaller and get larger over time. You’ll make monthly payments for up to ten years, or potentially longer if you choose certain payment plans.
You’ll also be able to defer your loan payments—like hitting pause on your payment schedule—under certain circumstances, such as if you pursue additional schooling or encounter major financial hardship. Generally, Federal Direct loans offer a broader range of repayment options than private loans, potentially making it easier for you to fit loan payments into your adult life.
One caveat to keep in mind, however, is that if you don’t pay back your Federal Direct loans on schedule, the consequences can be serious. Your credit history will take a major hit, and you may have your wages or tax returns garnished. Federal Direct loans are also very difficult to have discharged; while some other debts can be erased if you file for bankruptcy later in life, student loans from the federal government will stick with you.
What Makes a Federal Direct Loan Subsidized or Unsubsidized?
Subsidized and unsubsidized Federal Direct student loans have similar policies, interest rates, and features. However, they’re differentiated from one another by their treatment of the interest that accrues while you’re still in college.
With either type of Federal Direct loan, interest will accumulate over time. If your loan is a subsidized Federal Direct loan, the US government will pay off the interest that accumulates on your loan while you’re still enrolled in college. If it’s unsubsidized, the government won’t pay off that interest, so it will remain and become part of the principal.
If you take out a subsidized Federal Direct loan, you probably won’t even notice your interest accruing and being paid off while you’re in college—the process happens automatically. However, over the life of the loan, your repayment total will be less than that of someone who took out an unsubsidized loan for the same amount. This might not sound like much, but it adds up.
An important factor to keep in mind is that eligibility for subsidized Federal Direct loans depends on your financial need, as determined by the FAFSA, so not every student will qualify for this particular loan type. Also, only a certain amount of your Federal Direct loans can be subsidized; however, you can take out unsubsidized loans in addition to the subsidized loans that you qualify for.
Unsubsidized Federal Direct loans are available to graduate and professional students as well as undergraduates, but these graduate loans are governed by a different set of policies in terms of things like loan limits. When you’re researching Federal Direct loans, make sure you’re only taking into account rules and regulations that apply to you as an undergraduate.
Building a Loan Package that Works for You
Obviously, financial aid that comes in the form of grants is preferable to loan-based aid in nearly all cases, since you won’t have to pay it back later on. You should do your best to exhaust your potential grant aid sources, from institutional financial aid to scholarships, before you consider taking out a student loan at all.
However, as you know, funding your education entirely through grant aid isn’t always possible. Student loans can bridge the gap and provide the flexibility you need in order to attend college, but not all loans are equal. It’s important to research your different loan options so that you can better understand the commitment that you’re making.
If you do need to take out student loans, your choices to consider will depend on your individual situation. As we’ve mentioned, subsidized Federal Direct student loans are only available to students who demonstrate a certain level of financial need, as determined by the FAFSA. This is yet another reason to fill out your FAFSA as early as possible after it becomes available.
A general rule of thumb is that Federal Direct student loans are preferable to private student loans, and subsidized loans are preferable to unsubsidized loans (if you qualify). Unless you have special access to truly exceptional private loan options, which most students don’t, you should exhaust your Federal Direct student loan options before considering private loans.
If you need to take out student loans and you qualify for subsidized Federal Direct loans, start with those for a lower overall loan cost and better terms than private loans. If you need more loan funding than you receive in subsidized loans, or you don’t qualify for subsidized loans, you can move on to unsubsidized Federal Direct loans, which have some of the same borrower-friendly perks.
Certain college students may be eligible to receive more funding in unsubsidized Federal Direct loans than the standard allocation for undergraduates. If you’re considered independent when it comes to the FAFSA, or if your parents are ineligible for Federal PLUS loans (a type of government parent loan for educational expenses), your loan limits may be higher. (Most college applicants don’t fall into either of these categories.)
Even if you’re eligible to take out more in loans, that doesn’t mean it’s necessarily a good idea for you to do so. Each situation is different, and if you have this option, you should carefully consider its implications before making the commitment.
As always, you should be cautious when deciding whether to take out student loans. Educational debt is a serious commitment and comes with risks. While Federal Direct loans are generally better for borrowers in many ways, as we’ve mentioned, they’re also extremely difficult to have discharged if you run into financial trouble later in life.
However, many students use loans as a financial tool to help make college possible, and you may find that the risks of taking out student loans are well worth the opportunities and benefits that college will provide. Doing your research, keeping close track of your loan details, and otherwise being an informed borrower will help you to create a financial plan for college that suits your resources and needs.
For More Information
Take a look at these posts from the CollegeVine blog to learn more about what it means to take out student loans, your obligations as a borrower, and how to decide what loans are appropriate for you.
Looking for more help navigating the often-confusing world of college admissions? Our experienced application consultants can help you put your best foot forward and find a college that’s a great match for your needs. To learn more about the services we offer, check out the CollegeVine College Application Guidance Program website.