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What is the Difference Between a Subsidized and Unsubsidized Stafford Loan?

Confused about the differences between subsidized and unsubsidized Stafford loans?

Stafford Loans in Plain English

Stafford loans are government-backed student loans that students (undergraduate, graduate, or professional) can take out in their own name to help pay for higher education.

There are two kids of Stafford loans:

  • Subsidized Stafford loans
  • Unsubsidized Stafford loans

The differences between subsidized and unsubsidized loans are who can qualify for the loans and who pays the interest on the loans while the student is in school.

When you take out subsidized loans, the government pays the interest on these loans while you are in school, during a six-month grace period following graduation, and during any authorized deferments. The fact that interest does not accumulate on the loan during the years you are in school can save you thousands in repayments.

Subsidized Stafford loans are need-based (i.e., the less you and/or parents earn, the larger the amount of subsidized loans you will qualify for). Even for eligible students, however, subsidized loans are subject to annual limits that may not cover the entire cost of tuition.

Unsubsidized loans are not need-based (anybody can apply), but you are responsible for paying all the interest that accrues during school, the grace period, and during deferments. You may make interest-only payments while you are in school (cheaper in the long run) or allow the interest to accrue during school and begin repaying the original principal plus accrued interest upon graduation.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Tracy Mooney says:

    We qualify for the subsidized stafford loan but could pay out of savings instead. We are thinking about taking the full amount anyway and banking it and pay it all back after graduation, thereby earning the interest for 4 years. What might I be missing? It sounds too easy.

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