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Subsidized vs. Unsubsidized Student Loans
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Ian D. (He/Him)
Certified Credit Union Financial Counselor
Posted October 26, 2017
Direct subsidized loans
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The term “subsidized” refers to support from the federal government for interest charges on a student loan. It means the U.S. Department of Education will pay the interest on your subsidized loans as long as certain conditions are met (most commonly, attending school at least half-time). This type can be particularly helpful if you’re going to be in school for an extended period because you don’t have to worry about interest piling up while you’re completing your degree. Subsidized loan offers are based on financial need and are only offered to undergraduate students.
Direct unsubsidized loans
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Unsubsidized loans do not receive financial support, so interest starts adding up when the loan is issued. This type is generally offered to both graduate and undergraduate students, although the interest rates may differ by level of education. Interest is charged over time based on the loan balance, so paying it back more quickly will lower interest costs. Students who start paying their loans back while still in school should aim to pay unsubsidized loans first. Paying monthly interest at the very least will prevent additional interest from being charged on unpaid amounts from previous months.
“I’m making payments, but they’re mostly paying the interest!”
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Loan payments typically cover interest charges first and the rest is applied to the principal balance (the loan amount actually borrowed). When you start paying loans back, interest will be at its highest because the balance is high. As you continue to pay, the decreasing balance will result in less interest charges and a larger portion of each payment will be applied to the principal balance. For this reason, making larger payments early will cause the balance to decline faster and have the biggest impact on reducing the amount of interest you pay.
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