Stafford loans are divided into unsubsidized and subsidized loans. Each type of loan is offered through the Federal Direct Student Loan Program with the United States Department of Education. Unsubsidized loans are student loans that accrue interest during the student's college years until graduation, and therefore the student is responsible for paying the interest.
What is an Unsubsidized Loan?
Any student can apply for an unsubsidized loan without demonstrating a financial need. Although the student is responsible for paying the interest that accumulates with this type of loan, he may qualify for a deferment during enrollment in college. However, if the student obtains a loan deferment, she is required to pay the interest that accumulates on the loan after graduation. The interest is added to the principal balance until the full balance on the unsubsidized student loan is paid. For instance, a $10,000 unsubsidized student loan for four years will accumulate interest that increases the amount the student owes at the end of the four-year college term and after graduation or withdrawal from college.
Subsidized Loan Definition
A subsidized loan means that interest does not accrue while a student is attending college on at least a part-time basis. To obtain a subsidized student loan through the Federal Direct Student Loan Program, a student must demonstrate a financial need. Therefore, a student must meet certain qualifications to obtain this type of loan. Since the student is not responsible for the loan interest accrued while she is enrolled in school, the government pays this interest on subsidized loans. After graduation or withdrawal from college, responsibility for paying the interest on subsidized loans transfers from the government to the student.
Subsidized vs Unsubsidized Loans
The major difference between an unsubsidized loan and a subsidized loan is the student's obligation to pay the interest. Also, the required conditions to qualify for an unsubsidized loan are less stringent than the conditions to qualify for a subsidized loan. Moreover, limits are placed on the amount a student can obtain each year with a subsidized loan.
Benefits of Unsubsidized Loans
Although the student is responsible for paying the interest on unsubsidized loans during enrollment in school, the student may have an opportunity to qualify for a higher loan amount each year than with subsidized loans. Even if a student obtains a subsidized student loan, the student may apply for an unsubsidized loan. Keep in mind that even for unsubsidized loans, interest can accrue quickly over four or more years of college and it does add up.
Pay Now to Save Later
Some students opt to pay the interest on unsubsidized student loans during enrollment in school to avoid having to pay for the accumulation of interest on the loan after graduation. While it may be tempting to wait until finishing school to start paying student loans, it will cost you more in the long run than if you pay some of it down while you are still attending school.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.