The United States Department of Education’s Free Application for Federal Student Aid (FAFSA) helps people from all economic backgrounds attend college. Through this application, students can receive grants, scholarships, and loans. Every year, the FAFSA helps connect ample financing to some 13 million students in need.
The two most popular types of funding that students receive from the Department of Education are subsidized and unsubsidized loans. Let’s differentiate between the two types of loans, look at a few statistics, and ultimately determine the pros and cons of both subsidized and unsubsidized loans.
What is a subsidized loan?
While you’re enrolled in college, interest accumulates on loans you use to finance your education. However, the United States Department of Education is nice enough to pay all the interest on that loan while you’re enrolled at least half-time – six credit hours per semester – at an institution of higher education in the United States.
The interest on subsidized loans is also paid during deferments, or periods during which loan payments are postponed. Recent graduates typically take deferments while they’re searching for employment.
What is an unsubsidized loan?
Interest that accumulates on unsubsidized loans is not paid for by the US Department of Education. Although students aren’t responsible for making payments on student loans while they’re enrolled in school, the interest accumulates indefinitely.
Students can take deferments to delay paying their unsubsidized loans, as well, though interest still accumulates during these grade periods.
Which is the better loan?
Put simply, subsidized loans are a better option than their unsubsidized counterparts. Unfortunately, schools typically offer restricted amounts of subsidized loans to students. The total cost of unsubsidized loans that students take out almost always exceeds the dollar value of subsidized loans they use to pay for school-related expenses.
Here’s a strategy you should use in taking out college loans
If possible, do not take out any unsubsidized loans. Rather, only take out subsidized loans to finance the payment of tuition and school-related expenses.
Unfortunately, most students are unable to finance their way through school without accepting unsubsidized loans. As such, you may not be able to avoid unsubsidized loans entirely.
Thankfully, grants are more abundant than student loans in terms of government-given financing for college
Roughly 55 percent of the total dollar value of financing delegated to undergraduate students by the United States Department of Education came in the form of grants. Only 34 percent of federally-funded dollars were doled out in the form of repayable loans.
The benefits of subsidized loans are plenty
Subsidized loans are the clear winner in the battle between subsidized loans and their unsubsidized, interest-hungry counterparts.
Many young people take on loan refinancing offers from financial servicers, effectively lowering their interest rates, minimum payments, or otherwise enhancing their loan agreements. People who took out only subsidized loans during their college days are much less likely to refinance their loans.
Although refinancing can be a good thing for people who are in debt, financial services offering these services profit from refinancing consumer debt. Refinancing can result in you ending up in a worse position than what you were in before refinancing!