What’s the Difference Between Subsidized and Unsubsidized Student Loans?

Subsidized vs unsubsidized student loans

Federal student loans generally come in two flavors: Subsidized and unsubsidized. But in the rush and excitement of receiving your student aid package, you probably haven’t given much thought to what the difference is between these two types of loans.

That’s a big mistake, because the difference between subsidized and unsubsidized loans can cost you thousands of extra dollars in interest as you pay off your student loans.

The Basics

Though there are differences between subsidized and unsubsidized student loans, there are a lot of similarities, especially when it comes to the basics.

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At their core, both unsubsidized and subsidized loans are loans. This means that you are borrowing a certain amount of money, or principal, that you will need to pay back, along with interest, which is essentially the price you pay for borrowing the money.

Though the standard repayment plan for federal student loans is 10 years (or 120 payments), you have a lot of income-based repayment options available to you if you find yourself struggling to make payments. These payment plans will differ based on your loan type (Stafford vs. Perkins vs. PLUS, etc.) but not based on whether or not the loan is subsidized or unsubsidized.

You can also place both subsidized and unsubsidized loans in deferment or forbearance, so long as you meet certain eligibility requirements.

Differences Between Subsidized and Unsubsidized Loans

The differences between subsidized and unsubsidized student loans generally revolves around the way that interest accrues, with subsidized student loans being much more favorable for your wallet.

In short, subsidized loans don’t accrue interest while you are enrolled as a student or at any point that your loans are in deferment. Unsubsidized loans do accrue interest during these times, which means that unsubsidized loans will cost you a lot more money over the life of the loan.

This is especially true if, at the end of your college enrollment or period of deferment, you cannot pay the interest which has accrued. At that point, the interest is capitalized (or, added to the principal) which means that you will be paying interest on top of your interest. No bueno.

What to Do If You’ve Got Both Types

If you’ve got both subsidized and unsubsidized student loans, keeping everything in check and creating a repayment strategy might seem really overwhelming. Ultimately your payment strategy will depend on your own financial circumstances and long-term financial goals, but there are a few things that you should keep in mind.

To save as much money as possible it’s important to avoid interest capitalization, which is most likely to impact your unsubsidized loans (subsidized loans will only accrue interest during periods of regular repayment or during a period of forbearance). You can reduce the impacts of interest capitalization by working while you are enrolled in school and applying your income to cover the interest that is accruing.

You can also do this by trying your best to not place unsubsidized loans into deferment. Instead of deferment, look towards income-based repayment plans as a way to make payments easier. If you do place your unsubsidized loan into deferment, the interest that accrues, especially if it capitalizes, can easily add thousands of dollars to your balance.

The Bottom Line

Subsidized and unsubsidized federal student loans are different in key ways, specifically related to the way that interest accrues.

To make sure that you save as much money as possible over the life of your loan, it’s important for you to understand just what these differences are. If you don’t truly understand the differences, then you will likely wind up paying much more in interest over the life of your loan.

If you’re brand-new to the world of student loans, you should take a look at our introductory guide that will help you understand all of the student loan basics.

About Tim Stobierski

Tim Stobierski is the founding editor of Student Debt Warriors. A freelance writer and editor with a passion for teaching people about all things personal finance, his goal is to help parents and students tackle their student loan problems so that they can live happier, healthier lives. Tim's writing has appeared in a number of publications, including The Huffington Post, The Hartford Courant, Grow Magazine, and others. His first book of poetry, "Chronicles of a Bee Whisperer," was published in 2012 by River Otter Press.

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