Subsidized vs Unsubsidized Student Loans

April 13, 2018
By: Mason Gallik

You may have noticed that some federal loans are subsidized, while some are unsubsidized. Many people ask, “What is the difference between subsidized and unsubsidized student loans?” There is one big difference between the two that should be taken into account when taking out student loans. Generally, there are two types of subsidized loans, Stafford Subsidized and Perkins. Private, PLUS, and Stafford Unsubsidized are all unsubsidized loans. The main difference between subsidized and unsubsidized loans is that interest does not accrue on subsidized loans while you are enrolled full time in college. This can potentially add up to a lot of savings!

Let’s say Jason has to take out $5,000 worth of loans to cover his college expenses. In his financial aid package, he was offered:

$3,500 – Stafford Subsidized
$2,000 – Stafford Unsubsidized
$2,000 – Perkins

Both types of Stafford loans currently have an interest rate of 4.45% with an origination fee of 1.066%. The only difference is that the subsidized loans do not accrue interest while Jason is in college. Perkins loans are subsidized as well, but they have a higher interest rate of 5%. At first glance, you might think that it would be better to take out both Stafford loans because of the lower interest rate, but since Perkins are subsidized this is not the case. The effective interest rates if he studies for 4 years and enters a 10-year repayment plan for these loans are:

2.52% – Stafford Subsidized
4.53% – Stafford Unsubsidized
2.69% – Perkins

You may notice that Stafford Unsubsidized’s effective rate is greater than its listed interest rate. This is because we took into account origination fees since they make an effective rate higher. Stafford Subsidized and Perkins have low effective rates because Jason would get to borrow that money interest free for a little over 4 years. This can save hundreds of dollars in accrued interest as Jason is attending school. Jason should take out the full $3,500 in subsidized loans and then take out $1,500 of the Perkins loans offered.

As you can see, loans that are subsidized have nice financial benefits. Despite Perkins loans having higher interest rates, it would be wise to take them out before Stafford Unsubsidized loans because of the benefits of being subsidized. There has been rumblings of eliminating Stafford Subsidized loans. If that happens, borrowing would become more expensive for students.