Government Student Loans: Subsidized vs. Unsubsidized

When it comes to big-ticket items you have to pay for in your lifetime, it doesn’t get much bigger than higher education. Indeed, predictions are that college tuition will increase by about twice the rate of general inflation, year over year. This would mean, in 20 years, the average annual cost of tuition for a four-year public program would rise from today’s $5,132 to $19,859 and the cost of a private program from $20,082 to $77,711.

But help is at hand. For wanna-be college students (and their parents) who could benefit from a financial leg up in this department, here’s a primer on what’s available.

Types of financial aid

The most ideal sources of funding for your child’s education are scholarships and grants that don’t require repayment. Even those lucky enough to qualify rarely receive enough to foot the whole bill. Fortunately, there are several types of student loans. They are distinguished by various factors, including their rates of interest, repayment terms, maximum available amounts and whether the onus of repayment falls on the student or his or her parents.

Some principal sources of student financial aid are:

  • federally funded student loans
  • parent loans
  • private loans
  • other loans
  • state aid
  • institutional assistance

Federal loans

The U.S. Department of Education’s Federal Student Aid (FSA) programs provide nearly 70 percent of all financial aid for American students. FSA is available to students -- both undergraduate and graduate -- enrolled in eligible programs at participating schools. In most cases, they’re granted based on a student’s need.

Stafford loans are long-term, low-interest loans regulated by the federal government. They are given to students (rather than to their parents) and must be repaid with interest following the completion of their education term.

How much?

A student’s financial need is calculated based on his or her expected family contribution (EFC), academic level and the anticipated cost of his or her education (including tuition, room and board, and books). Worksheets that show how the EFC is calculated are available at, or you can request a free copy of the EFC Formula by calling 1-800-4ED-PUBS, and asking for the Federal Student Aid Handbook.

When is it to be paid back?

Students are required to begin paying off their Stafford loan debt six months after they graduate, or after their enrollment drops to less than half-time.

Subsidized versus unsubsidized

Stafford loans come in two types: subsidized and unsubsidized. Interest accrued on a subsidized student loan during school is paid by the government. Borrowers have up to 10 years to repay their subsidized federal Stafford loan.

Unsubsidized loans start charging interest from the moment the money is given to the student. Sometimes, the lender offers the borrower the option to make “interest-only” payments over the course of his or her time in school. Unsubsidized Stafford loans can be used to supplement subsidized Stafford loans.

Borrowers have up to 10 years to repay their unsubsidized federal Stafford loans. However, they must pay interest while they are in school, unless they make arrangements to postpone or capitalize them (add them to the principal) at the start of the repayment period.

Who qualifies?

To be eligible for a Stafford loan, subsidized or non-subsidized, you must:
  • be enrolled as a full or half-time undergraduate, graduate or professional student;
  • be a U.S. citizen or eligible resident non-citizen;
  • meet financial need criteria as defined by the federal government;
  • sign an application and promissory note.

Federal Perkins Loans

Federal Perkins loans are low-interest government-funded loans made available through schools to very needy students. No interest is charged on Federal Perkins Loans while a student is enrolled in a post-secondary school at least half-time. Students must begin repaying the loan nine months after they graduate, or after their enrollment drops to less than half-time.

Parent loans

If a family prefers, parents can take on a loan for their undergraduate child’s education in their name. Through the Parent Loan for Undergraduate Students (PLUS) program, financial institutions lend money to parents to cover the education expenses of a dependent.

Generally, PLUS funds are limited to the amount needed to cover education expenses less the contributions of other financial aid. Depending on the lender, payment of PLUS loans begins after the final disbursement. Borrowers have up to 10 years to repay.

To qualify for a PLUS loan, you must:

  • be a parent of a dependent, undergraduate student who is enrolled full or half-time
  • be a U.S. citizen or eligible resident non-citizen
  • have a satisfactory credit history

Private loans

If a student or his or her parents don’t qualify for government student loans, or if they simply require more money to meet the financial requirements of post-secondary education, there are other options.

Private loans, which come from private institutions such as banks and credit unions, are not guaranteed by the government. Their rate of interest, along with their terms and conditions, are set by the lender. In some cases lenders will not require any payments while the student is in school and may even offer flexible repayment options after graduation. But private loans’ specifics vary widely, so students should shop around.

Other loans

Students and parents can also investigate other borrowing sources to cover the cost of education. One option is a home equity loan. The interest on these loans is also usually tax deductible.

State aid

Many states offer financial assistance to students attending college in their state. Contact your state higher education agency for more information.



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