Lately, I have been fielding a number of questions about the differences between subsidized Stafford Loans and unsubsidized ones. Given how frequently this topic seems to come up, I thought I should post a quick synopsis of my answer here on the blog. Here’s the deal:
If you get your financial aid award and it says you have been approved for a student loan, odds are it is the Stafford Loan. (Far less common is the Perkins Loan, which provides low-interest loans to low-income students.)
There are two different kinds of Stafford Loan: Subsidized and unsubsidized. With a subsidized loan, the government subsidizes the cost of your daily interest payments as long as you are enrolled in school at least half-time. Meanwhile, the lender freezes your principal repayments until you graduate. In short, you pay back less money over the life of a subsidized loan because the interest is temporarily subsidized by the federal government. Subsidized loans are distributed on a strictly need basis.
With an unsubsidized loan, you — and not the federal government — are responsible for paying all the interest. Typically, your repayments will be frozen while you are enrolled in school (at least half-time), however your interest will continue to accrue. A significantly lower financial need threshold is required to qualify for an unsubsidized Stafford loan.
Both the subsidized and unsubsidized Stafford loans have caps, which increase slightly each year between your freshmen and senior years. The total amount you can borrow on an unsubsidized Stafford is a bit higher than on a subsidized loan.
Your financial aid award letter, issued from your college’s financial aid office, will clearly state how much you are eligible to take out in both types of loans. If you are awarded both types of loan, it would be wise to max out your subsidized amount before borrowing from an unsubsidized loan.
To qualify for either type of Stafford loan, you must complete the Free Application for Federal Student Aid (FAFSA). The information you disclose on your application enables the Department of Education to evaluate your family’s level of need based on income, assets, debts and other variables.