Sunday, November 13, 2011

Subsidized vs. Unsubsidized

So, what's the difference between a Subsidized and Unsubsidized loan?

In this case, I am referring to a Stafford loan from the Federal government. There are two types of loans you can qualify for: the Sub and the Unsub. There really is very little difference between the two. They are both loans through the same loan program, you have to fill out the same paperwork for both, and both have interest. There are a few differences though.

1.) The interest rates are different, for now. The Sub's interest rate is 3.4% and the Unsub's rate is 6.8%. If no new laws or rules are passed between now and July 1, 2012, then the interest rate of the Sub will change. As of that day, the interest rate of the Sub will go up to 6.8%, making the two loans have the same rate. This will be the first time since 2007 that the rates will be equal.

2.) The way interest accrues is different. The Sub's interest is subsidized by the government while you are in school (hence the name "subsidized loan"). Once you graduate, the interest will start to accrue. The Unsub's interest will begin to accrue while you are still in school. Because of this, it's always a good idea not to borrow an Unsub if you don't have to. If you have to, then it's a good idea to keep it as small as possible.

3.) The Sub is a need-based loan. By need-based, I don't mean "I need a loan." It's financial aid need-based. This is a little more strange of a concept for non-FA people. The easiest way to think about it is if you take your Cost of Attendance, then subtract your EFC from it, and then subtract everything you have at hand to be used to pay your tuition at that time (grants, scholarships, state agency funding, etc.), and what you are left with will be your unmet need. If it's more than 0, then you will qualify for a Sub loan, because you have demonstrated a financial need for it. Usually the EFC is the largest deciding factor in this. If you have a high EFC (over 15,000), it is very likely you won't qualify for a Sub, or part of a Sub.

4.) Loan limits are different. An Unsub's limit for a dependent student in 2011 is only $2000 and an independent's limit is $6000. A Sub's limit is $3500 for the first year, $4500 for the second year, and so on, without any difference between dependent or independent.

These are the main differences for Sub and Unsub loans. One good thing about them is that even though they are two separate loans, when you go into repayment, as long as they are both with the same servicer, then you can just make one payment for both (instead of one for each one). If the loans ended up at different places, then you would have to make two payments (unless you consolidate), but that's a whole other post.

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