Subsidized Vs. Unsubsidized Loans

By Timothy Hayes on August 5, 2015

It is no great secret that college in the United States is extremely expensive. The price tag for school is simply astronomical, especially when compared to other universities in other countries.

Just heading north across the border one can easily see the price difference between US and Canadian schools. It’s not just north of us either; in Europe, many countries have transitioned to completely free tertiary education. If you want it and are good enough to get in, you don’t have to pay for it. A growing movement in the US now wants a similar system.

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With rising college tuition costs, students are looking for ways to fund the investment. Firstly, students seek out scholarships to fund their endeavor. The best part about scholarships is that they are essentially free money and they can be awarded for any reason be it ethnic, academic, or something else.

There are scholarships for being a woman in engineering. There are scholarship for being the first person in your family to go to college. There are scholarships for being a certain ethnicity. There are even scholarships for people with red hair. With all this money floating around, you’d think that no one would have trouble paying for school.

But it’s a bit more complicated than that. Most scholarship recipients receive one or two scholarships worth a fraction of their tuition. So without the rest paid for, students need to seek alternative means of paying for school — and many choose to join the military.

Military service has been seen by some as an alternative to college education for a while now. However, the US military has taken it upon themselves to change that idea. They offer thousands of dollars in service loans.

Service loans are essentially an agreement by the loan recipient to serve for a certain number of years in the military and sometimes to graduate with a certain degree that the military could find useful, like in a foreign language or computer science. These loans are usually pretty generous and are paid off with a corresponding number of years of service. However, if the student drops out without a degree, they are still responsible for repaying that loan.

Some majors will not have a specific scholarship and others won’t be paid for by the military, so inevitably, some will be left out in the cold. Those people are now left with two options: pay for school out of pocket or take out loans. It’s actually not as drastic as it sounds, but those are the next two basic options.

With the mention of loans, some students shake with fright. The looming burden of debt hanging over them like the Sword of Damocles is enough to make everyone hesitate to sign away their soul to college loan sharks.

Before anyone takes on any loan, they should understand it and what it means for them down the road. Right now, student loan debt in the US is estimated to be between $900 billion and $1 trillion with an average student debt of $28,400.

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There are two basic kinds of loans: unsubsidized and subsidized.

Subsidized loans are the lesser of two evils because while you’re in school, the loans aren’t going to be accruing interest. Why? Well, that’s because the US government is paying the interest while you’re in school and for six months afterwards.

Wait, what? The US government is loaning you money, paying the interest on it for 4 years and 6 months, and then asking for money in return? Well essentially, yes, they are.

This is better explained by saying that the US government is not going to charge the interest and will pretend you never had a loan until six months after you leave school. Because of this, subsidized loans are almost exclusively government loans.

The second kind of loan is an unsubsidized loan. These can be extremely dangerous loans to get since they accrue interest from day one of you signing the agreement. These interest rates are usually dangerous because they can quickly gain thousands of dollars of debt beyond what the original amount was.

However, these unsubsidized loans are freely available from banks, loan agencies, and even the government. They do usually have lower interest rates than subsidized loans, except for the federal version of these.

The federal subsidized and unsubsidized loans have equal interest rates right now and consequently it would behoove students to take out as much money in subsidized loans from the government as possible while taking out as little as possible in unsubsidized loans. This way you can maintain as little debt as possible for as long as possible.

With the debt crisis in Greece making headlines and concerns about national debt being brought back up in the US, one has to wonder about the state of affairs when student loan debt in the US is higher than most countries’ GDP. For now, you can arm yourself with knowledge on what loan is best for you and use that to help decrease your personal debt.

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