As a student or prospective student, it is important that you understand the differences between subsidized and unsubsidized student loans. It can make a big difference in the amount of student loan debt that you take on. (Hopefully you don’t take on any student loan debt though!) Understanding the differences between these two types of student loans is not really that difficult. However, most people have just never been taught the differences between subsidized and unsubsidized student loans. So allow me!
(1) Differences and Similarities
At their core, both subsidized and unsubsidized student loans are the same thing: student loans.
They are simply loans that are taken out to help pay for higher education expenses. They will both accrue interest, have to be paid back, and have to be used for higher education.
The differences between these two types of loans is the interest that is accrued.
UNsubsidized student loans accrue interest from the time that you take them out.
SUBSIDIZED student loans do not accrue interest until you start paying on them.
You can think of it like this as well:
The interest that you accrue on your SUBSIDIZED student loans is SUBSIDIZED by the Department of Education. The Department of Education pays the interest on your student loans for you until you have to start paying on them yourself.
Subsidized student loans will NOT accrue interest while:
- You are in school at least half-time.
- Are in your grace period after you graduate or leave school.
- Are in a deferral period.
And as I stated before, UNsubsidized student loans will accrue interest from the time that the loans are taken out.
It’s really as simple as that. 🙂
(2) Subsidized vs. Unsubsidized Loan Example
Let’s look at the example of Tom and Jerry.
Tom takes out $10,000 in student loans at a 5% interest rate and his loans are unsubsidized.
Jerry also takes out $10,000 in student loans at a 5% interest rate but his loans are subsidized.
It takes both of them 5 years to finish college. During the time they are in school they do not make any payments on the loans.
| Tom | Student Loans Taken Out | Unsubsidized Interest Rate (5%) | Total Owed |
| Year 1 | $10,000 | $500 | $10,500 |
| Year 2 | $0 | $525 | $11,025 |
| Year 3 | $0 | $551.25 | $11,576.25 |
| Year 4 | $0 | $578.81 | $12,155.06 |
| Year 5 | $0 | $607.53 | $12,762.81 |
| Jerry | Student Loans Taken Out | Subsidized Interest Rate (0%) | Total Owed |
| Year 1 | $10,000 | $0 | $10,000 |
| Year 2 | $0 | $0 | $10,000 |
| Year 3 | $0 | $0 | $10,000 |
| Year 4 | $0 | $0 | $10,000 |
| Year 5 | $0 | $0 | $10,000 |
As you can see, Tom’s UNsubsidized student loans accrued $2,762.81 worth of interest that he is responsible for paying.
On the other hand, Jerry’s subsidized student loans accrued NO interest that he has to repay.
Final Thoughts
I understand that paying for college can be EXTREMELY difficult. I am under no illusion that most students will have to take out some amount of student loans.
However, do whatever you can to keep your student loan borrowing to a minimum. Also, if you have the opportunity to take out subsidized and unsubsidized student loans, take out the subsidized ones first. They can save you tens of thousands of dollars in the long run.
Paying for college can be really daunting. But I am here to help you in any way that I can. 🙂
I will do my best to give you all the tools that you need to (not only) pay for college but to get ahead of your financial lives. That way you can do whatever you want without the daily financial stress that most of us have. 🙂
You can do this!
Until next time!
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