The Trump administration recently released their proposed budget and it changes a lot about college funding. Among other changes that clearly reduce college access to students (e.g., eliminating the forgiveness program for people working in public service), the new budget proposes a substantial change: removing subsidized loans. What does that mean for student loan borrowers? What is the difference between subsidized and unsubsidized student loans?
Both subsidized and unsubsidized loans are considered Direct Loans; i.e., they are distributed directly from the federal government. They both require students to be enrolled at least half time in a program that leads to a degree or certificate at a participating school. The major difference is in the interest.
For subsidized loans, the government pays the interest while the student is in school, during the built-in 6 month grace period after the student leaves school and during deferment. That means that a student borrowing $10,000 in student loans will owe exactly that much when they begin repayment.
Subsidized loans are currently only available to undergraduate students with financial need. There are limits to how much subsidized loans a student can get: a student can get subsidized loans for no more than 150 percent of the published length of program (e.g., for a 4 year program, a student can get 6 years of subsidized loans).
For unsubsidized loans, the student is responsible for interest accrued while in school, whether that means the student pays the interest each month or defers it, in which case it capitalizes when the loan enters repayment.
For a student who borrows $10,000 in unsubsidized student loans and chooses to defer interest while in school, the balance will be higher than $10,000; i.e., the total repayment balance will be $10,00 plus all accrued interest. This higher principal balance translates to higher interest during repayment and more paid over the life of the loan.
Unsubsidized loans are available for students with or without financial need, and graduate students as well as undergraduate students can get them. Most unsubsidized loans have a grace period of 6 months, but interest continues to accrue. (PLUS loans do not have a grace period.)
The type of loan greatly affects the repayment plan after the student leaves college. Subsidized loans are often preferred because the loan principal is the same as amount borrowed, while for unsubsidized, many borrowers complain about bloated principal amount because it includes interest.
The switch to unsubsidized loans may save the government money, but it does so at the expense of students. The interest may not look like much in short periods, but it adds up in the end. Combined with the increased interest rates, student loans are sure to start costing students a lot more money over the life of the loan.
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