Subsidized Vs Unsubsidized Loans

Perkins, Stafford and Parent PLUS loans are some of the popular loans that are made available by the Federal Govt. to ensure that people fulfill their dream of receiving a good education despite not having sufficient resources. The government is encouraging people to pursue academic excellence by providing both subsidized and unsubsidized student loans. In addition to student loans, the govt. is also providing homeownership vouchers to first time home buyers to help them with their mortgage payments.

Subsidized Vs Unsubsidized Loans

What is Subsidized Loan?: A loan on which the borrower is not required to pay interest during the deferment period is referred to as a subsidized loan. The interest that accrues during this period is paid by the disburser, the govt. or some other charitable organization. Once the deferment period elapses, the principal starts accruing interest that has to be paid by the borrower.

What is Unsubsidized Loan?: An unsubsidized loan is one that accrues interest from the time the loan is disbursed till it is repaid in full. In some cases, people may be allowed to defer their interest payment for a certain length of time. However, since the interest is capitalized, it is added to the principal balance of the loan and the borrower is then forced to pay interest on the amount of principal as well as interest.

Subsidized Loan Information

The discussion on subsidized vs unsubsidized loans assumes importance from the perspective of student loans since the govt. provides subsidized Direct loans and subsidized Federal Family Education Loans (FFELs) to deserving students. In general, federal subsidized student loans carry a low fixed rate of interest and allow the students to defer repayment for a maximum of six months after graduation. Moreover, the credit rating of the borrower is irrelevant. People, who are interested in procuring student loans with no credit checks may refer to the article, 'Student Loans with No Credit History'.

Subsidized Stafford Loans: Subsidized Stafford loans, both Direct and FFEL, are provided to borrowers on the basis of their financial situation. The borrowers are also entitled to avail an unsubsidized loan in addition to receiving a subsidized Stafford loan. Depending on whether the Stafford loan is a Direct loan or a FFEL loan, the borrower obtains the loan from the Federal Govt. or from lenders participating in the FFEL loan program respectively. The interest rate for subsidized Stafford loans that have been disbursed on or after July 1st, 2009, has been fixed at 5.6 percent. A Stafford unsubsidized loan means an interest rate of 6.8 percent. The repayment period for all Stafford loans ranges between 10 and 25 years depending upon the amount borrowed and the type of repayment plan.

Perkins Loans: Federal Perkins loans are highly subsidized student loans that are provided to students who demonstrate exceptional financial need. These loans are disbursed by participating schools to undergraduate, graduate and professional degree students. The loan has to be repaid over a period of 10 years and the interest rate on the loan is fixed at a meager 5 percent. Moreover, the loan carries no origination fees or default fees. However, defaulting on student loans has serious repercussions. Hence, repaying student loans is a must, regardless of financial constraints.

Homeownership Voucher: People, who buy a home by availing a mortgage loan, are expected to make both interest and principal payments on a monthly basis. A homeownership voucher program subsidizes principal and interest payments, mortgage insurance, real estate taxes, homeowners insurance and other expenses, since Public Housing Agencies participating in the program pay a certain amount of money on a monthly basis either to the creditor or to the homeowner in lieu of the voucher. Homeownership assistance payment is generally for a period of 10 years.

Hopefully, the above article would have shed light on subsidized vs unsubsidized loans. The aforementioned subsidies help people meet their financial obligations without much hassle. The strict eligibility criteria for availing subsidized student loans and for obtaining homeownership vouchers makes it difficult for people to qualify for the same. Thankfully, unsubsidized Stafford loans have less stringent requirements. People, who are interested in buying a home, can opt for FHA insured loans that carry a low rate of interest, since the govt. agrees to make good the amount of loan in case of default.