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Difference Between Subsidized & Unsubsidized Loans

by Mark Kennan, Demand Media

    Subsidized loans are loans in which someone other than the borrower pays some or all of the interest on the loan. With an unsubsidized loan, the borrower is responsible for all of the interest. These loans are most commonly used to pay for college. With the rising cost of college tuition, more students and their families are turning to loans to finance their college education.

    Advantages of Subsidized Loans

    If you are offered a subsidized loan to help pay for college, that means that while you are in school the government will make interest-only payments on your loan. The government will continue to make these payments until you graduate or you stop attending school. If you take out an unsubsidized loan, you are responsible for the interest that accrues on your loan while you are in school.

    Subsidized Stafford Loans

    Stafford loans are backed by the federal government and can be either subsidized or unsubsidized. Loan offers are determined by the financial need of the student and his family based on their financial need. According to FinAid, two-thirds of the subsidized loans are given to students whose family's adjusted gross income is $50,000 or lower. If you are given subsidized Stafford loans the federal government will pay the interest on the loans while you are in school.

    Unsubsidized Stafford Loans

    If you do not qualify for subsidized Stafford loans, you may be offered unsubsidized Stafford loans. If the loan is unsubsidized, you are responsible for either making interest-only payments while you are in school or you can allow the interest to build up and begin making payments after you leave school.

    Perkins Loans

    Perkins loans are another type of government-subsidized loan for students attending college. Participating colleges and universities are allocated a certain amount of Perkins loan funds each year by the federal government and the schools use whatever criteria they choose to offer those loans to students at that school. Students who accept these loans are not responsible for the interest that builds up while they are in school.

    PLUS Loans

    The PLUS loan is an unsubsidized loan offered to graduate students and parents of undergraduate students. Your PLUS loan is limited to the difference between other forms of financial aid, including government backed loans and scholarships. The interest rate is fixed around 8 percent. Since it is an unsubsidized loan, there is no assistance from the government with the interest while you are in school.

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    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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