One of the most valuable investment items that one can have is education, but not at a necessary high tuition. Nowadays, studying at a post-secondary level has almost become a prerequisite for many students, and thus, student loans are indeed the real deal. There are basically two types of student loans available to students: subsidized and unsubsidized loans. What are they? And which one is for you? This blog is going to take each and detail them as a means of guiding you through the pros and cons of each so you can make an informed decision in light of your financial goals and academic aspirations.
Understanding the Basics: What Are Student Loans?
It is great to first appreciate what student loans are before going deep into the details of subsidized and unsubsidized loans. A student loan is some money borrowed by a student from the government or other private lenders to help offset expenses connected with education, be it tuition, books, living expenses, etc. Student loans often have good interest rates compared to other types of loans. Repayment is often delayed until after graduation.
Student loans are provided in Canada by the federal government under the Canada Student Loans Program (CSLP). The loans are provided by the program and also by the provincial and territorial governments. Most of these provinces, for example, Ontario and British Columbia, combine the provincial loans with the federal loan, but all have separate loans, too.
What Is a Subsidized Student Loan?
A subsidized student loan is a type of loan in which the government pays the interest of the loan while one is in school. Therefore, whenever you take out a subsidized loan, you will not be accumulating interest until after graduation or when you stop attending school full-time.
In Canada, needs-based funds are disbursed through the federal government’s Canada Student Grants and Loans. Loans are disbursed on a needs basis, so you must prove you have a need for them in order to qualify.
Key Features of Subsidized Loans:
- Interest-Free While in School: The government covers the interest on your loan while you are enrolled in a qualifying educational program.
- Needs-Based: Your eligibility for a subsidized loan is determined by your financial need, which is assessed based on your income and, in some cases, your parents’ or guardians’ income.
- Grace Period: After graduation, you typically get a grace period of six months, during which you do not have to make payments. Interest may or may not accrue during this period, depending on your province.
- Income-Dependent Repayment: Some repayment plans for subsidized loans are income-driven, meaning your monthly payment is determined by your post graduation income level.
What Is an Unsubsidized Student Loan?
An unsubsidized student loan is a loan in which interest starts to accrue directly as soon as the loan is disbursed, even when you are in school. In other words, you start paying interest from day one, but you are not required to make payments until after you graduate.
Unsubsidized loans are easier to avail of because they do not depend on financial needs, thus making them accessible to students who may not qualify for subsidized loans.
Key Features of Unsubsidized Loans:
- Interest Begins Immediately: Interest starts accruing on the loan from the moment it is disbursed.
- No Financial Need Requirement: You do not have to demonstrate financial need to qualify for an unsubsidized loan.
- Higher Loan Limits: In some cases, unsubsidized loans may allow you to borrow more money than subsidized loans.
- Flexible Repayment Terms: Like subsidized loans, unsubsidized loans also offer flexible repayment terms, including income-driven repayment options.
Key Differences Between Subsidized and Unsubsidized Loans
Basically, the difference between a subsidized loan and an unsubsidized loan comes from who is paying the interest that is accrued while you are in school. Now, however, there are a number of other differences when comparing the two types of loans, so below is a side-by-side comparison so you can get an idea of how these differ:
| Feature | Subsidized Loan | Unsubsidized Loan |
| Interest Accrual While in School | Interest is covered by the government. | Interest accrues from the disbursement date. |
| Financial Need Requirement | Yes, you must demonstrate financial need. | No financial need is required. |
| Loan Limits | Typically lower loan limits. | Higher loan limits. |
| Repayment Period | Begins after a six-month grace period. | Begins after a six-month grace period, but interest starts earlier. |
| Eligibility | Needs-based, income is a factor. | Available to all students, regardless of income. |
| Cost Over Time | Typically cheaper over time due to no interest while in school. | More expensive over time due to interest starting earlier. |
Advantages of Subsidized Student Loans
Subsidized loans offer several benefits, especially for students who are concerned about long-term debt and interest accumulation. Here are some of the key advantages:
- Lower Overall Cost
Since the government pays the interest while you are in school and during the grace period, a subsidized loan will generally cost you less over the life of the loan compared to an unsubsidized loan.
- Protection Against Long-Term Debt
By not accumulating interest during your education, subsidized loans allow you to focus on paying down the principal balance rather than worrying about a growing mountain of debt. This is particularly advantageous if you have a longer academic journey, such as pursuing multiple degrees.
- Income-Based Repayment
Subsidized loans often come with more favourable income-based repayment options. This means that after you graduate, your loan repayment is based on how much money you’re making, which can be a huge relief for those just entering the workforce.
Disadvantages of Subsidized Student Loans
Despite the many advantages, there are also some downsides to subsidized student loans that students should be aware of.
- Eligibility Restrictions
Subsidized loans are needs-based, which means not everyone qualifies for them. If your income or your family’s income exceeds the threshold, you may not be eligible for this type of loan.
- Lower Loan Limits
In some cases, subsidized loans come with lower borrowing limits than unsubsidized loans. This means that even if you qualify, you may not be able to borrow enough to cover all your educational expenses.
- Dependence on Financial Need
Because these loans are based on financial need, your loan amount may fluctuate depending on your family’s financial situation, which can make budgeting for school more difficult.
Advantages of Unsubsidized Student Loans
Unsubsidized loans, while more expensive over time, offer a different set of advantages that may appeal to certain students.
- No Financial Need Requirement
The most significant advantage of unsubsidized loans is that they are not dependent on your financial need. Anyone who applies is eligible, making them an option for students who may not qualify for subsidized loans.
- Higher Borrowing Limits
Unsubsidized loans often allow you to borrow more money compared to subsidized loans. If you have substantial educational expenses, such as higher tuition fees or additional living costs, unsubsidized loans may offer the flexibility you need.
- Flexibility in Loan Use
With fewer restrictions on how much you can borrow, unsubsidized loans may provide the additional funds needed for extra educational expenses, such as books, transportation, or even rent.
Disadvantages of Unsubsidized Student Loans
While unsubsidized loans are more accessible, they come with a few significant disadvantages that you should consider carefully before taking one out.
- Higher Cost Over Time
Because interest accrues from the moment the loan is disbursed, unsubsidized loans will end up costing more over the life of the loan compared to subsidized loans. Even though you don’t have to start paying while you’re in school, the interest that accumulates will eventually be added to your total debt.
- Immediate Interest Accumulation
Interest begins accruing immediately, meaning that the longer you wait to pay back the loan, the larger your debt will grow. This can make it harder to manage payments once you graduate, especially if your post graduation income is not as high as expected.
- Potential for Higher Debt
Since unsubsidized loans allow for higher borrowing limits, there is a risk of accumulating more debt than you can comfortably pay back. This could lead to financial challenges down the line, especially if you don’t find a job that pays well enough to cover your loan payments.
How to Decide Between Subsidized and Unsubsidized Loans
Having discussed the pros and cons of subsidized and unsubsidized loans, the question is: Which one is best for you? Well, the answer will depend very much on your financial situation, academic plans, and postgraduate goals. Here are some factors to consider:
- Assess Your Financial Need
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- If you can demonstrate financial need and qualify for a subsidized loan, it’s generally the better option due to its lower long-term cost. However, if you don’t qualify for subsidized loans, you’ll likely need to rely on unsubsidized loans to fund your education.
- Calculate Your Total Education Costs
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- Look at how much money you will need to complete your degree. If your educational expenses exceed what you’re eligible to borrow through a subsidized loan, you may need to supplement it with unsubsidized loans or other forms of financial aid.
- Think About Your Future Earnings
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- Consider what your income might be after graduation. If you expect to enter a high-paying field, you may feel more comfortable taking on a higher level of debt. However, if your post graduation income is uncertain, a subsidized loan may be the safer bet, as it will not accumulate interest while you’re in school.
- Consider Loan Repayment Plans
- Both subsidized and unsubsidized loans offer flexible repayment plans, including income-based repayment options. Consider how much flexibility you’ll need to repay your loans and whether your expected post graduation income will cover your payments.
Can You Combine Subsidized and Unsubsidized Loans?
The most important point is that many students take unsubsidized and subsidized loans to fill the whole study budget. Of course, it’s mostly relevant if the student qualifies for subsidized loans but still needs more funds for remaining expenses. Then, one should take care of both types of loans to keep overall debt at a minimum.
Tips for Managing Combined Loans:
- Pay Off Unsubsidized Loans First: Since unsubsidized loans accrue interest while you’re in school, it’s a good idea to focus on paying these off first if you can afford to make payments before graduation.
- Make Interest Payments While in School: Even though you’re not required to make payments while enrolled, paying off the interest on unsubsidized loans can prevent your loan balance from ballooning.
- Explore Loan Forgiveness Programs: Depending on your career path, you may qualify for loan forgiveness programs that could wipe out a portion of your student loan debt.
Alternative Financial Aid Options
While subsidized and unsubsidized loans are the most common forms of student financial aid, they are not the only options available. Here are a few alternatives to consider:
- Grants and Scholarships
Grants and scholarships are forms of financial aid that do not need to be repaid. In Canada, the federal and provincial governments offer a variety of grants, including the Canada Student Grant for students from low- and middle-income families. Scholarships, which are often merit-based, can also help cover educational expenses without adding to your debt load.
- Bursaries
Bursaries are similar to grants but are often needs-based. Many universities and colleges in Canada offer bursaries to students who demonstrate financial need. Like grants, bursaries do not need to be repaid, making them an excellent alternative to loans.
- Work-Study Programs
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- Work-study programs allow students to work part-time on campus while studying. The income earned can help offset educational costs, reducing the need for loans. These programs are available at many Canadian post-secondary institutions.
- RESPs (Registered Education Savings Plans)
For students whose families have contributed to a Registered Education Savings Plan (RESP), this can be a valuable source of funding. The money in an RESP grows tax-free until it’s withdrawn for educational purposes.
Conclusion: Which Loan Is Best?
This is basically your decision, depending on your financial situation and what you hope to achieve with your education. If you get qualified to take subsidized loans, they are usually cheaper since you don’t gain interest while in school. The unsubsidized loan offers a flexible alternative if you need additional funding or you do not qualify.
For the most part, these combinations of both types of loans, grants, scholarships, and work-study programs can carry your educational expenses through until graduation without overwhelming you with debt. Of course, it is only common sense to judge your financial situation, calculate the total education costs, and determine what you can expect in regard to future earnings before even taking on a loan of either type.
Know More: How to Choose a Student Bank Account?