What is the Difference Between Subsidized and Unsubsidized Loans?

The major difference between subsidized and unsubsidized loans involves the payment of interest. With a subsidized loan, someone other than the borrower is responsible for paying the interest on the loan. When a loan is unsubsidized, the borrower must pay interest on the loan, beginning at the time of disbursement.

Often, the differences between these types of financing come into play when student loans are involved. When a student acquires a subsidized student loan, another party takes care of the interest. Typically, the entity paying the interest on a subsidized student loan is the federal government. In such cases, the federal government picks up the tab for the student’s loan interest while he or she is enrolled in school. The government also pays the interest on subsidized loans while students are within allowed grace periods and when loans are in deferment.

It is important to note that subsidized loans do not provide complete freedom from paying interest. Once a student is no longer enrolled at least halftime in school, he or she becomes responsible for paying interest on the loan. Interest does not accrue, however, when the loan is in a grace period or deferment. This is one way in which subsidized and unsubsidized loans are alike. At some point, the borrower usually does pay interest.

When an individual obtains an unsubsidized student loan, he or she may be able to avoid paying interest while enrolled in school by capitalizing it. In such cases, the capitalized interest simply adds on to principal amount that must be repaid. Once the student is out of school, he or she will have even more to repay because the new interest on the loan will be based on a combination of the loan principal and the interest that was capitalized during enrollment.

One of the most apparent differences between educational loans of this type involves the demonstration of need. With subsidized loans, students must demonstrate that they have a certain level of need for financial aid. The opposite is true of unsubsidized loans. Unsubsidized loans are typically available to students without regard to their financial circumstances.

Subsidized and unsubsidized loans may be held the same time. This means there is no need to wait to pay off one type of loan before obtaining another. Furthermore, there are some loans that are both subsidized and unsubsidized. With this type of loan, the borrower is responsible for some of the interest on the loan, but not all of it.

There is also subsidized and unsubsidized financing for housing. To be approved for a subsidized home loan, the borrower has to meet certain requirements, such as those related to income and place of residence. Subsidized loans are frequently a part of first-time buyer programs. They are typically designed to help those who would ordinarily have trouble purchasing a home. Unsubsidized home loans are generally not need or residency based.

A loan may be subsidized by any person, charity, organization, or government entity. Both subsidized and unsubsidized loans have specific eligibility and approval requirements. These requirements vary depending upon the type of the loan and the preferences of the lender.