If you work with students who have received financial aid offers, they likely received a Federal Direct Student Loan, which is awarded to almost every student who submits a FAFSA?. It's a loan funded by the federal government and is included as a part of financial aid because of its competitive, fixed interest rate and favorable repayment options. The Direct Loan comes in two formats: Subsidized and Unsubsidized. What's the difference between the two? Read on.
- Both Subsidized and Unsubsidized Loans accrue interest while students are in school, but the U.S. Department of Education will pay the interest on a Subsidized Loan until six months after the student graduates or drops below half-time enrollment. That means the Subsidized Loan will ultimately cost? less over time than a Unsubsidized Loan.
- Subsidized Loans are awarded based on financial need. Schools start with their?Cost of Attendance?(the total cost for one year at that school) and subtract the students?Student Aid Index?(a calculated number based on the family's financial strength and ability to pay for college) to determine the student’s financial need. They then do their best to fill in this need with need-based financial aid, including the Federal Direct Subsidized Loan.
- Students can receive, at max, $3,500 in a Subsidized Loan for freshman year. And the combination of the Subsidized and Unsubsidized Loans cannot exceed $5,500.?
- Students don't have to demonstrate?any?financial need to receive an Unsubsidized Loan.
- Students can receive, at max, $5,500 in an Unsubsidized Loan for freshman year.?And the combination of the Subsidized and Unsubsidized Loans cannot exceed $5,500.
- Though an Unsubsidized Loan will accrue interest while the student is in school, they don't need to pay that interest until six months after they graduate or drop below half-time enrollment.
- Both have the same fixed interest rate. That rate for the upcoming academic year's loans is determined at the end of May every year and is set for the life of the loans. View the current interest rate?here.
- Both have an origination fee, which will be subtracted from the loan amount before the loan funds are placed in the student account. View the current origination fee?here.
- Students will need to complete?entrance counseling?and sign a?Master Promissory Note?before receiving their loans. The college will provide instructions on how to complete these requirements.
- Students will have?several options?on how to repay their loans once repayment begins.
- Subsidized Loans are only offered to students who demonstrate financial need, which means the student's?Student Aid Index?is less than the school's?Cost of Attendance.
- Students don't accrue any interest on subsidized loans while they are enrolled at least half time in a degree-seeking program. Students?always?accrue interest on unsubsidized loans, even while they're in school.
- Subsidized Loans also don't accrue interest during the grace period, the six-month period after a student leaves school. Unsubsidized Loans?do?accrue interest during that time.
- Due to the lack of interest while in school, Subsidized Loans end up costing a student less than Unsubsidized Loans.
Students must submit the FAFSA every year to receive their Federal Direct Student Loans, so make sure that's on their radar. And students should know that they don't need to borrow the full amount of student loans they receive. They can request that the financial aid office reduce the loan amount anytime.
