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Pell Grants, Subsidized, and Unsubsidized Loans: What Do These Terms Mean?

Key Takeaways:

  • Become familiar with common terms found in financial aid award letters
  • Understand how eligibility for different types of aid is determined
  • Understand the difference between subsidized and unsubsidized loans

By Kate Strassel | Citizens Bank Staff

After months of touring campuses, filling out forms, writing essays, and waiting, your admission offers have finally arrived. Your heart soars as you imagine hanging out in your dorm with your roommates, walking across the quad to your first college class, and studying late at night in the library.

Once the euphoria subsides, it’s time to focus on the big question: How are you going to pay for your education? Each school will send you a financial aid award letter, either with your offer of admission or separately. Included in each letter are acronyms and terms that will likely make your head spin: COA, EFC, Pell Grant, subsidized loans, and more. What do they all mean? How do you know which school is offering the most affordable option?

Don’t worry —you’ve got this. Read on to learn about common financial aid acronyms, what a Pell Grant is, the differences between subsidized and unsubsidized direct loans, and how a private loan can bridge the gap between your award funds and the cost of attendance for your dream school.

Cost of attendance (COA)

A school’s cost of attendance (COA) is simply the estimated cost per academic year to attend that school. Included in this amount are your tuition and fees, room and board, books and supplies, and other costs such as transportation. The COA for your chosen school is likely to change from one academic year to the next.

Expected family contribution (EFC)

This is the amount that the government feels you and your family can contribute toward the COA. It’s calculated based upon the information you provided on your Free Application for Federal Student Aid (FAFSA).

When determining how much financial aid to offer you, colleges usually subtract your EFC from the COA. The difference will dictate the amount of your award.

Your EFC can be met in a variety of ways, including funds from a college savings account (529), personal savings accounts, and private loans made to you (with or without a cosigner) or your parents.

“Gift” money: Scholarships and Pell Grants

Arguably the best kind of aid you can receive is the kind you don’t need to repay! Both scholarships and Pell Grants fall under this category, but there are a few differences between these two types of “gift” money.

Scholarships usually require students to apply and meet specific requirements to be considered. For example:

  • Merit-based scholarships are awarded for academic achievement, or a combination of academics and talent or specialized interest.
  • Need-based scholarships require that applicants demonstrate a financial need, determined by the organization.
  • Group-specific scholarships are offered to students who belong to or have an association with a particular group such as gender, ethnicity, profession, or interest.

There are scholarships available to undergraduate, graduate, and professional students. Award amounts vary from a few hundred dollars to the entire cost of your tuition. The disbursement of scholarship funds can also vary, so check with your school or the organization offering the scholarship to determine how your award will be applied to your COA.

A Pell Grant is federal aid that’s awarded to undergraduate students who demonstrate financial need. While there isn’t a separate application required, eligibility is determined by several factors, including:

  • The information provided on your FAFSA
  • You and your family’s EFC
  • Your college’s COA
  • Your student status (full- or part-time)

The maximum federal Pell Grant award amount changes from year to year. For the 2019-20 academic year, that maximum is $6,195 for undergrads.

If you’re the recipient of a Pell Grant, the funds will be disbursed by the U.S. Department of Education to your college, which will apply them directly to your COA, to you, or both.

In order to maintain your Pell Grant from one academic year to the next, you’re required to:

  • Remain continuously enrolled in an undergraduate course of study
  • Complete the FAFSA for each academic year

Subsidized and unsubsidized direct loans

Also known as Federal Stafford loans, both subsidized and unsubsidized loans are awarded by the federal government to eligible students who are enrolled at least half-time at a participating school.

These government loans can be attractive to students and their families because:

  • Interest rates are fixed and do not change over the life of the loan.
  • Eligibility is not credit-based; every approved borrower receives the same limits, rates, and terms.
  • Flexible repayment options are available, including income-driven repayment plans.

Each school determines the loan type, as well as the amount you’re eligible to receive each academic year. To receive your subsidized or unsubsidized loan, you’ll submit a Master Promissory Note (MPN) and complete entrance counseling. Once the MPN has been signed and the entrance counseling completed, the college will apply the funds to any outstanding tuition, room and board, and other fees.

There are, however, a few key differences that distinguish subsidized loans from unsubsidized loans.

Subsidized loans:

Unsubsidized loans:

Require a demonstration of financial need

Don’t require a demonstration of financial need

Are available to undergrad students only

Undergrad and grad students are eligible

Interest is paid by the U.S. Dept. of Education while you’re in school, for first 6 months after you graduate, and during deferment periods

You are responsible for paying interest during all periods, including while you’re in school. Any unpaid interest accumulates and is added to the loan principle.

Subsidized loans require you to demonstrate financial need. This determination is made based upon the information you provided on your FAFSA. You must also be an undergrad student who hasn’t previously earned a bachelor’s degree in order to qualify.

The U.S. Department of Education pays the interest on subsidized loans as long as you’re enrolled in school at least half-time, as well as for the first six months after you leave school and during deferment periods.

For unsubsidized loans, there’s no requirement to demonstrate financial need, and they’re available to both undergrad and grad students. Unlike subsidized loans, you’re responsible for paying interest during all periods, including while you’re enrolled in school. If you choose not to pay interest while in school or during grace or deferment periods, the interest accumulates and is added to the principle amount of your loan.

Private student loans

Private student loans are made to a student, their parents or guardians, or both by a non-government lender, such as a bank, credit union, state agency, or school. Students applying for a private loan often require a cosigner (usually a parent or guardian) due to the student’s minimal credit history.

Private loans could have either variable or fixed interest rates and are unsubsidized; therefore, you’re responsible for paying all interest on the money borrowed. Private lenders may require you to make payments while you’re still in school, although some will allow you to defer payments until you’ve graduated.

What to remember

Now that you have a better understanding of those financial terms listed on your award letter, you’re prepared to decide which school can offer you the most affordable college education. If you’re still a bit unsure, reach out to your school’s financial aid office — they’ll be happy to review your award letter with you and answer any questions.

More information

We are committed to helping you reach your potential. If you have questions, or would like more information about how to pay for college, please call 1-888-411-0266 to speak to a Student Lending Specialist, visit us online, or stop by your nearest Citizens Bank branch.

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