College students who would like to receive financial aid in the form of federal student loans need to fill out the FAFSA, or Free Application for Federal Student Aid. Based on their responses on this form, students are offered either subsidized or unsubsidized federal loans. Although both types of loans are provided by the federal government, they differ in a few key areas.
Subsidized federal loans come in two major forms, the Stafford loan and the Perkins loan. The federal government also offers unsubsidized Stafford loans for students and unsubsidized PLUS loans for parents or graduate and professional students. All of these types of loans are either Direct Loans from the Department of Education or Federal Family Education Loans guaranteed by the government but provided by a private lender.
Subsidized and unsubsidized loans are differentiated by how interest is addressed while the student is in school. With a subsidized loan, the federal government pays all of the interest on the loan while the student is in school. With unsubsidized loans, students are responsible for paying interest even while they are in school. Lenders allow students to defer interest payments while they are in school if desired, but the accrued interest is all added to the principal amount when the loan enters repayment after graduation.
Federal subsidized loans generally have much lower interest rates than federal unsubsidized loans. Subsidized Stafford loans for undergraduates have an interest rate of 4.5 percent for those taken out for the 2010-11 school year and 3.4 percent for the 2011-12 school year. Perkins loans, all of which are subsidized, carry a fixed interest rate of 5 percent. Unsubsidized or graduate student Stafford loans have a fixed interest rate of 6.8 percent as of 2010. Unsubsidized PLUS loans have an interest rate of 7.9 percent through Direct Loan or 8.5 percent through the Federal Family Education Loan program.
Students must fill out the FAFSA, or Free Application for Federal Student Aid, to apply for any kind of federal loan. Unsubsidized Stafford loans and PLUS loans are available to all students and families who submit the FAFSA, regardless of financial need. Subsidized Stafford loans and Perkins loans are only offered to students who the government judges to have significant financial need. Two-thirds of the students who receive subsidized Stafford loans come from families with an adjusted gross income of $50,000 or less.
The limits on how much money can be borrowed are smaller on subsidized federal loans than on unsubsidized federal loans. Limits for subsidized loans range from $2,625 per year to $8,500 per year, depending on the student's dependency status and year in school. Students who receive subsidized loans and still have additional financial need can also obtain some unsubsidized loans to make up the difference. The limit for unsubsidized loans is anywhere from $2,000 to $32,000 more than for subsidized loans.