Subsidized vs Unsubsidized Loan
A loan is a sum of money that is borrowed for which interest is paid during the duration of the loan period. Loans are taken out by individuals, firms, organizations and other entities to fulfill their short term and long term financial requirements. The following article focuses particularly on subsidized and unsubsidized loans that are mostly related to loans taken out by students for college education purposes called ‘student loans’. The article provides the reader a clear explanation of both types of loans, what effects either has on the borrower and outlines the differences between the two.
What is Subsidized Loan?
Subsidized loans are usually offered because the student has some sort of financial difficulty and is unable to repay the loan amount or interest on the loan immediately. For a subsidized loan, the government will give the student a break on the loan and interest repayments by paying the interest on that loan. However, the student cannot enjoy this financial benefit forever and will have to start paying the interest and the loan amount once their period in school is over. The major advantage of an unsubsidized loan is that the student is able to get temporary financial relief. Interest amounts that are paid on a subsidized loan also do not accrue which provides the student further financial relief even after they have left school.
What is Unsubsidized Loan?
An unsubsidized loan is the opposite of a subsidized loan. When a student takes out an unsubsidized loan, they will be responsible for interest payments from the beginning, even during the period in which they are at school. An unsubsidized loan can, however, be tailored in a way, to provide student temporary financial relief. This is called ‘capitalization’ where the interest will keep adding onto the principle amount while the student is still in school. This means that the student will not have to pay interest on their loan, but when they leave school they will have to repay the loan and interest, which would have increased since now interest will be calculated on the total capitalized amount.
Subsidized Loan vs Unsubsidized Loan
Subsidized and unsubsidized loans are very different to each other even though most of the time these types of loans are taken out by students who are currently at school or college pursuing higher studies. The main difference between these two types of loans is the amount that can be borrowed. The amount that can be borrowed in a subsidized loan is much less than the amount that can be borrowed in an unsubsidized loan. The other major difference is that, to obtain a subsidized loan, the student must prove that they are experiencing financial difficulties, whereas an unsubsidized loan can be obtained without such proof.
Summary:
Difference Between Subsidized and Unsubsidized Loan
• Subsidized and unsubsidized loans are very different to each other even though most of the time these types of loans are taken out by students who are currently at school or college pursuing higher studies.
• Subsidized loans are usually offered because the student has some sort of financial difficulty and is unable to repay the loan amount or interest on the loan immediately.
• For a subsidized loan, the government will give the student a temporary financial relief, giving a break on the loan and interest repayments by paying the interest on that loan. The interest amounts also do not accrue.
• An unsubsidized loan is the opposite of a subsidized loan. When a student takes out an unsubsidized loan, they will be responsible for interest payments from the beginning, even during the period in which they are at school.
• The amount that can be borrowed in a subsidized loan is much less than the amount that can be borrowed in an unsubsidized loan.
• To obtain a subsidized loan, the student must prove that they are experiencing financial difficulties, whereas an unsubsidized loan can be obtained without such proof.