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Stafford Loans: Subsidized Vs. Unsubsidized

Mark P. Cussen, CFP®, CMFC, AFC

Stafford Loans are now the most popular type of student loan in America today. They offer many benefits to students and borrowers, including multiple repayment plans, low interest rates, loan consolidation if necessary and ease of qualification.

They come in two basic forms: subsidized and unsubsidized. Both types share some common features, but there are key differences between them.

Who's Eligible

Both types of loans require the student to meet the following criteria:

  • Be U.S. citizens or approved equivalents

  • Be working toward a valid degree or certificate

  • Be at least half-time students

  • Have a high school diploma or GED

  • Register with Selective Service (if male and between 18 and 25)

  • Keep at least a 2.0 GPA

  • Have no drug-related offenses on their record

  • Must not owe money on any federal student grants

The income-qualification difference. To receive a subsidized Stafford loan, students must meet specified criteria for low family income as determined by the FAFSA (Free Application for Federal Student Aid). The unsubsidized loan has no income requirements.

In addition, only undergraduates are eligible for subsidized loans. Starting in 2012, graduate students became ineligible for subsidized loans regardless of their level of need.

Your school will determine which loans you qualify for and apply the funds to your school account to pay for tuition, room and board, and other fees you owe. Any money left over will be returned to you.

Basically Identical: Origination Fees, Interest Rates, Usage, Repayment Options

Origination fee. Both types of loans charge a 1% origination fee, which is deducted from each loan disbursement automatically.

Co-signer. Neither loan requires one.

Interest rate. As of 2013, interest rates charged for Stafford Loans began to be tied to the 10-year Treasury note, with an additional margin added on to cover expenses. Both subsidized and unsubsidized loans for undergraduates will charge 4.66% for loans for the 2014-2015 school year, while grad students will pay 6.21% on their debt. They do not depend on the borrower's credit score.

Income-tax deduction. Borrowers can deduct up to $2,500 of the interest paid on either type of loan from their modified adjusted gross income each year, as long as it falls below the maximum allowable threshold.

FAFSA form. Both types of loans require the submission of the FAFSA form, along with a promissory note to repay the debt after graduation.

How loan can be used. Either type can be used to pay for virtually any type of educational expense, from tuition and lab fees to room and board, a personal computer and dependent care.

Repayment Options. Borrowers have the choice of a standard fixed-payment option, a graduated-payment option that rises over time and an income-based option that rises and falls with the borrower’s income.

Although most of the options have 10-year repayment terms, there is an extended repayment plan that allows borrowers to stretch out their loans for up to 25 years.

Advantage: Subsidized Loan – Interest Payments

The most important difference is that the federal government pays interest on subsidized loans as long as the student is in school half-time – or has an authorized loan deferral. Obviously, this is a significant savings on the overall cost of borrowing money. Students don't have to start paying back the loan until six months after they cease being a half-time student.

With an unsubsidized loan, students are charged interest during the time they are in school. They can pay that interest while studying or have it rolled into the loan. As with the subsidized form, students don't have to start repayments until six months after they cease being a half-time student.

Advantage: Unsubsidized Loan – Amount You Can Borrow

You can borrow more money if you're getting an unsubsidized loan: For the 2014-2015 school year, first-year students who qualify for a subsidized loan may only borrow $3,500, regardless of whether they are claimed as dependents on another tax return or not. The limit for unsubsidized loans is $5,500 for first-year students who are claimed as dependents and $9,500 for those who claim themselves.

The cumulative amount of subsidized loan money that can be borrowed to complete an undergraduate degree is $23,000, compared to $31,000 to $57,500 for dependent and independent undergrads who get unsubsidized loans.

The Bottom Line

Subsidized and unsubsidized Stafford Loans are designed to allow students with different levels of financial need to pay for higher education expenses. They are similar in many respects but also have important differences. For more information on Stafford Loans, consult your school's financial aid office. For more information, see Investopedia's student loans tutorial.



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