Word of the Day Wednesday: Subsidized/Unsubsidized Loan
Each Wednesday, MEFA will feature a Word of the Day, in which we'll highlight a word (or sometimes a phrase) related to the college planning process. This month, we're focusing on vocabulary related to Federal Direct Student Loans, and will highlight terminology related to borrowing a Direct Loan.
Today's Word of the Day is Subsidized/Unsubsidized Loans.
Federal Direct Student Loans come in two formats: Subsidized and Unsubsidized. Many students receive both a Subsidized Loan and an Unsubsidized Loan for each year of college. Students must file a Free Application for Federal Student Aid (FAFSA®) to be considered for Subsidized and Unsubsidized Loans (as well as all other federal financial aid).
A Subsidized Loan is a loan given to a student based on the student's eligibility for need-based federal financial aid and helps to pay for college costs. The borrower of a Subsidized Loan is not responsible for any interest that accrues on the loan during the following periods:
- While the borrower is in school at least half time
- During any deferment periods
- During the borrower's grace period (the first six months after the borrowers leaves school)
Only undergraduate students may receive a Subsidized Loan.
An Unsubsidized Loan is a loan given to a student to help pay for college costs. It does not require the student to demonstrate any eligibility for need-based federal financial aid and is available to both undergraduate and graduate students.
The borrower of an Unsubsidized Loan must repay the interest that accrues on the loan during all periods.
Subsidized and Unsubsidized Loans have the same interest rate, which is set annually based on the 10-year Treasury note. There are annual and aggregate limits for both Subsidized and Unsubsidized Loans, and repayment on both the Subsidized and Unsubsidized Loans begins after the student's grace period, though students may choose to repay early with no penalty.
Why does this matter to you?
If you decide to borrow loans to pay for college, you should elect to borrow a Federal Direct Student Loan first, before exploring private loan options. As a Direct Loan borrower, knowing the difference between Subsidized and Unsubsidized Loans will help you understand the amount of interest accruing on your loans, which impacts the total cost of the loan.
For more details on Subsidized and Unsubsidized Loans, including loan limits and repayment information, visit the Federal Student Aid website.