FAFSA: Subsidized Loans vs. Unsubsidized Loans for College

Paying for college is usually the first major financial decision you will have to make in life, and for most of us, that will include whether or not to take out student loans, and how much to borrow. Understanding your loan options is critically important to this process.

The two main types of student loans that you will be eligible to receive when applying for financial aid are federally subsidized student loans and unsubsidized student loans. The amount of each that you qualify for will be based on a variety of factors including you and your parents' financial situation and the total cost of attending the university that you have chosen. This is done through the FAFSA form, and after applying the government will notify you of the loan amounts that you qualify for, and what portion of that is subsidized.

FAFSA: Subsidized Loans vs. Unsubsidized Loans

There are important distinctions between the two loan options. Federally subsidized student loans are loans that the government pays the interest on while you are attending school, for the first six months after leaving, or during any period of approved deferment. Fully subsidized loans do not accumulate interest during this time. This is hugely advantageous to the borrower and can result in saving thousands of dollars over the lifetime of the loan. As a result, it should be your goal to finance as much of your education with subsidized loans as possible. Subsidized loans are strictly limited to only the amount you need to pay for your education. Most other expenses are not eligible for this type of student loan.

The second type of student loans are federally unsubsidized loans. Unlike the federally subsidized option, you do not need to demonstrate a financial need for the money that you are borrowing with unsubsidized loans. Because of this, you can use the loan to pay for things that are not directly related to the cost of your education or room and board. While this adds greater flexibility to you as the borrower, your loans will begin accumulating interest from day one. There is no grace period or other options to avoid this, so they can be much more expensive overall than the alternative option.

My Personal Advice

Your college education is an investment in yourself, and into your future. Student loans can be intimidating, but they can be more than worth the cost. Ultimately the amount of loans that you take out is going to be dependent on a vast amount of different considerations, and your school’s financial advisor is an excellent resource you can use to help answer any questions you have and navigate the FAFSA form. As a general rule remember that it is always better to borrow as little as possible, subsidized or not, and to maximize the amount of subsidized loans for what you do have to borrow.

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