So, I’m writing this because the new school year is about to start and this is usually the time when new and returning college students file their financial aid or receive their financial aid offer.
And when it comes to financial aid, you will receive different kinds of offer depending on your financial standing and the funds available for you. In those offers, you will see two different federal student loans: Subsidized Loans and Unsubsidized Loans.
(So in this video, we’re going to discuss the difference between the two so you can make an informed decision as to what offer you should accept, and I’ll offer some tips as well on how to handle these loans.)
Subsidized Loans vs. Unsubsidized Loans
So when applying or receiving federal student aid, a lot of undergraduates are going to receive a Federal Direct Stafford loan. This loan is then divided into two versions – subsidized and unsubsidized.
A Subsidized Federal Direct Stafford loan, or simply, subsidized loan, is an undergraduate-only loan that is awarded to those who demonstrate financial need. The loan has an annual limit amount that you can borrow. And the most important benefit of this loan is that you don’t need to pay interest on it while you are in school. That’s why it’s called subsidized, because the government pays the interest while you’re in school or during periods of authorized deferment.
Not everyone is going to get this loan unless you demonstrate financial need. And when you receive this offer, you can choose how much money you’re going to borrow. You don’t need to accept the entire loan offer.
An Unsubsidized Federal Direct Stafford loan, or simply, unsubsidized loan, is available to both undergraduate and graduate students. Unlike subsidized loans, you do not need to demonstrate financial need to qualify for this loan. But similar as subsidized loans, there are annual limits to how much you can borrow.
The biggest difference with unsubsidized loans is that there is no interest subsidy. Meaning that the government will not pay for your interest accruals while in school or during periods of authorized deferments.
How much can you borrow?
I mentioned limits earlier while comparing the two loans. Your school determines the loan types and the actual loan amount you are eligible to receive for the academic year. There are two limits: the annual loan limit, which is the max amount you can borrow for the year, and the aggregate loan limit, which is the total max amount you can borrow for your undergraduate study.
The max loan amount varies depending on your financial status as well, whether you’re a Dependent or Independent Student. But for the sake of simplicity, I’m only going to discuss (in this video) the limits for Dependent Students. Here is a link to StudentAid.gov that explains the difference even further.
The First-Year Undergraduate Loan Limit is $5,500. $3,500 of that is subsidized, while the remaining $2,000 is unsubsidized. The Second-Year Limit is $6,500. $4,500 of that is subsidized, while the remaining $2,000 is unsubsidized. Your Third-Year and Beyond Limit is $7,500 per year. $5,500 of that is subsidized, while the remaining $2,000 is unsubsidized.
As for the Aggregate, or Cumulative, Loan Limit, you can only borrow $31,000 for your entire undergraduate study with $23,000 of those may be in subsidized loans.
So if you have a 4-year program, you may be eligible to borrow $27,000 with $19,000 of that may be in subsidized loans. The rest will be unsubsidized.
Tips on Federal Student Loans
My very first experience with federal student loans was back in 2017. It was my first year of going to a university here in the US. Prior to that, I’ve already gone to community college to finish general education requirements. I had to find a way to pay for university. So naturally, I went to file for my FAFSA, or the Free Application for Federal Student Aid, in order to help pay for college.
Just for context, I went to the University of California in San Diego, and they have a quarter system, meaning each term or semester only runs for 3 months, a quarter. With that in mind, all my student loans are disbursed at the beginning of a new quarter.
For my first year there, I took out $5,500 of subsidized loans and $1,697 of unsubsidized loans. That’s close to $7,500 in Direct Stafford Loans. I don’t remember if they considered me as Dependent or Independent because that’s more than the $5,500 limit for First-Year undergraduates. Maybe they considered me Third-Year because I’ve already taken the general coursework for my program in community college. I can’t find my documents anymore, so I don’t know.
So tip #1 is to keep your documents, especially with your student loans. You’ll never know when you will need to look again at your documents.
Moving on, I finished my first year and I only paid my student loans a couple of times throughout that year. I wasn’t consistent in paying them monthly, so at the end of the year, my unsubsidized loans started to capitalize. If you don’t know what that means, it means that I didn’t pay the interest, so my student loans grew. (I made a video explaining what this is, so check that out.)
So, tip #2 is to immediately start paying the minimum on your unsubsidized loans. Don’t wait for the end of the school year or years after when you graduate to look at your student loans. Remember that unsubsidized loans will continue to accrue interest while you’re in school. The government won’t be paying interest for those loans. If you don’t have enough to pay for both, it’s best to keep paying back on the unsubsidized first before the subsidized loans.
If you feel like, the loan offers are too much, remember that you have the option to not accept all of it. So, tip #3 is to accept the loan amount that you feel comfortable with. Just because the offer is huge doesn’t mean that you should take it all. There are those who only take the subsidized loans because they feel like they can manage without the unsubsidized ones. Remember that this is a loan that you will have to pay for in the future. Do not take on more debt unless necessary.
During my final years in college, I became increasingly anxious of what will happen next to me. And one of the first things that I really thought about was my student loans. I needed to figure out ways to pay them after graduating. My biggest mistake back then was that I thought I could handle everything on my own – looking for scholarships, applying for federal aid and all that.
If I had reached out to my school’s Student Aid Office, I would have positioned myself in a better place before I even graduated.
So the last tip is to keep in touch with your school’s Student Aid Office throughout your college experience. I know when you’re in college, things could get busy very quickly. But always put an effort to at least visit the Student Aid Office and meet with a financial aid counselor once a month to revisit your repayment plans.
They could help you find ways to repay your student loans while you’re in school or after graduation. They have access to resources and guides that will make you an informed student and not get caught up with the college debt craziness we are experiencing right now.
I hope this information helps you find the right federal loan for you!