The federal government offers several different types of loans to potential students. But one of the most common loans offered includes the Federal Direct Stafford Loan. Interestingly enough, there are two different types of the Direct Stafford loan: the direct subsidized loans and the direct unsubsidized loan. They are fairly similar, but there are a couple of big, key differences to keep in mind. Knowing these differences could help you manage your debt during school, setting yourself up for a better repayment experience.
What is a Federal Direct Unsubsidized Loan?
As mentioned earlier, a direct unsubsidized student loan is offered by the federal government to applicants pursuing higher education at both the undergraduate and graduate level. Students in need of funding can receive a direct subsidized student loan by filling out the FAFSA each year. The interest rate is a fixed rate of 4.45 percent for undergraduates entering the academic year of 2017 – 2018; the rate increases to 6.00 percent for graduates entering the same year.
The federal government allows borrowers to defer payments on these loans until a student leaves full-time enrollment status. During that deferment period, interest accumulates and compounds at the rates specified earlier. All the standard federal repayment options are offered on an unsubsidized Stafford loan.
What is a Federal Direct Subsidized Loan?
A federal direct subsidized loan is offered by the federal government to only undergraduates in pursuit of higher education. Applicants can receive a subsidized student loan by filling out the FAFSA, but preference is given to applicants who meet a certain financial need threshold. The interest rate on a subsidized Stafford loan is fixed at 4.45 percent for undergraduates entering the 2017 – 2018 academic year.
The government allows subsidized student loan borrowers to defer payments while attending school full-time. The government pays any interest that accrues on the loan during that deferment period and grace period following graduation.
Subsidized vs. Unsubsidized Loans: What is the Difference?
There is one main key difference when it comes to subsidized vs. unsubsidized Stafford loans: how interest accumulates during school, deferment, and the grace period. During these periods when payments are on hold, borrowers with an unsubsidized student loan are responsible for the interest that accumulates on their principal balance. Contrarily, unsubsidized student loan borrowers have a bit of breathing room because the government will pay off the interest that accrues during school and deferment periods.
There are a couple of other differences that are noteworthy. For starters, subsidized loans are only offered to undergraduates while unsubsidized student loans are offered to both graduate and undergraduate applicants. Subsidized loans are given to students who meet a financial need threshold, so those who have considerable expected family contributions are less likely to qualify. In fact, those who didn’t qualify for a subsidized loan are likely to receive an unsubsidized Stafford loan because there isn’t a financial need requirement.
There are a couple of similarities to mention. Rates on both types of Stafford loans are fixed, and the rate on both undergraduate loans is 4.45 percent. They are both offered by the Department of Education, and the loan amounts for both loans are determined by the school of attendance.
What are the Loan Limits for Subsidized and Unsubsidized Student Loans?
The loan amounts offered on subsidized and unsubsidized Stafford loans can be a bit confusing. Loan limits change from year to year based on your undergraduate status, and there are two different categories that recipients can fall into. These factors directly influence the maximum funding available to borrowers.
First, it makes sense to look at the Stafford loan program as a whole. There are two categories that borrowers fall within: dependent students and independent students (those who have a family contribution versus those who do not). In general, independent students are eligible for more funding.
Starting with dependent students, first-year undergraduates are eligible to receive up to $5,500 in total Stafford loan funding. Of this total, a maximum of $3,500 can be in subsidized student loans. Second-year undergraduates can receive up to $6,500, and $4,500 of this total can be in subsidized loans. Third-year and beyond undergraduates may receive up to $7,500 with a cap of $5,500 on subsidized funding. Graduate students are not included in the dependent student category.
Moving on to the independent student category, first-year undergrads can get a total of $9,500 in Stafford loans, and $3,500 of this amount can be in subsidized Stafford loans. Second-year independents can receive $10,500 in Stafford loans, and only $4,500 of this funding may be in subsidized loans. Third-year students and up are eligible for $12,500 in funding, but only $5,500 of this sum is eligible to be subsidized. Graduate students can receive up to $20,500, and none of this total may be subsidized.
Keep in mind that while certain portions of Stafford loan funding are eligible to be subsidized, it is entirely possible to receive the maximum limit in all unsubsidized loans. It all depends on an applicant’s financial need status.