- The Department of Education pays interest on subsidized loans while in school and the grace period.
- You'll be responsible for the interest that accrues on unsubsidized loans during all periods.
- To qualify for subsidized loans, you'll need to demonstrate financial need.
If you need to borrow money to help pay for the cost of higher education at a college, trade, career, or technical school, Direct Subsidized loans and Direct Unsubsidized student loans are two of your best options.
Both are low-interest loans issued by the federal government and come with many federal benefits. With either type of federal student loan, you can fully defer payment until six months after you leave school and you can join an Income-Driven Repayment (IDR) plan or pursue various federal forgiveness programs.
But beyond these similarities, there are a few terms, conditions, and benefits that make them different.
Comparing subsidized and unsubsidized loans
| Subsidized Loans | Unsubsidized Loans |
Interest While in School | Paid by the government | Accrues, your responsibility |
Eligibility | Based on financial need | Available to most students |
Loan Limits | Annual and total limits | Annual and total limits |
Interest Rates | May sometimes be slightly lower | Generally the same as subsidized |
Which type of loan should you choose?
Choosing subsidized loans to pay for school can save you a lot of money in interest charges. But they can be harder to qualify for than unsubsidized loans and there are stricter student loan limits on how much you can borrow and when.
Interest payment responsibility
The main difference between subsidized and unsubsidized loans comes down to who pays the interest that accrues while you're in school and during your grace period.
- Direct subsidized loans: The Department of Education will pay the interest on your loans while you're enrolled in school at least half-time, during your grace period, and during any period of deferment.
- Direct unsubsidized loans: You are responsible for the interest that accrues during all periods.
Keep in mind that neither type of loan will require you to make payments while you're in school. But with subsidized loans, the amount you borrowed will match your outstanding balance when repayment begins. With unsubsidized loans, on the other hand, your balance will also include the interest that accrued during your academic deferment.
Unsubsidized student loan borrowers can choose to make interest-only payments while they're still in school. But if you elect to not make any payments, your unpaid interest will be added to your principal balance when your regular repayment schedule begins.
Borrower requirements
The fact that the government pays the interest that accrues during deferment for unsubsidized loans makes them an incredibly attractive option. But they also have tougher borrower qualification standards:
Direct Subsidized loans
- Only available to students who are able to demonstrate financial need. The amount of money received cannot exceed the financial need.
- Only undergraduate students can take out subsidized loans
Direct Unsubsidized loans
- No requirement to demonstrate financial need
- Available to both undergraduate and graduate students
If your school's financial aid department determines that you don't have a financial need, you won't be able to take out any subsidized loans. And if you're a graduate or professional student, you won't qualify for a subsidized loan, regardless of your financial situation.
Loan limits
Even if you do qualify for some subsidized loans, there's a strong chance that you won't be able to pay for your entire education with them.
The annual and lifetime borrowing limits on subsidized loans are more rigid than unsubsidized loans. Here's how much you can borrow per year and overall with both types of loans.
| Year | Dependent Students | Independent Students |
| First-Year Undergraduate | Subsidized: $3,500 Unsubsidized: $5,500 | Subsidized: $3,500 Unsubsidized: $9,500 |
| Second-Year Undergraduate | Subsidized: $4,500 Unsubsidized: $6,500 | Subsidized: $4,500 Unsubsidized: $10,500 |
| Third-Year and Beyond Undergraduate | Subsidized: $5,500 Unsubsidized: $7,500 | Subsidized: $5,500 Unsubsidized: $12,500 |
| Graduate or Professional Student | N/A | Unsubsidized: $20,500 |
| Aggregate Loan Limit | Subsidized: $23,00 Unsubsidized: $31,000 | Subsidized:
Unsubsidized
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Time limits
For subsidized loans taken out after July 1, 2013, there is a limit to how many academic periods you can receive funds. Your maximum eligibility period will be 150% of the published length of your program.
So, for example, if you're enrolled in a four-year bachelor's degree program, your maximum eligibility period for subsidized loans will be six years (4 x 1.5 = 6) For a two-year program, you could only receive subsidized loans for three years (2 x 1.5 = 3).
Unsubsidized loans do not have any maximum eligibility periods. You can continue to qualify for them as long you're enrolled at least part-time in a qualifying higher-education program.
Interest rates and fees
For undergraduate students, subsidized and unsubsidized loans charge the same interest rate. Unsubsidized loans that are taken out by graduate or professional students, however, come with higher rates.
You can check the interest rates on your federal student loans by logging into StudentAid.gov or by contacting your loan servicer.
Application process
To apply for either type of Direct loan, you'll need to first submit your Free Application For Federal Student Aid (FAFSA).
Your school will analyze the information inside your FAFSA to decide how much federal aid you qualify for and if any of that aid can be in the form of subsidized loans.
Here are some quick tips on how to approach these two federal student loan types:
- Prioritize subsidized: Take the maximum you're offered first, as they save you money in the long run.
- Unsubsidized loans fill the gap: Use them to cover remaining need AFTER maximizing subsidized.
- Can't repay interest? (unsubsidized): Talk to your lender about capitalizing the interest (adding it to your loan balance after graduation).
FAQs
Your Student Aid Report (SAR) after filing the FAFSA will specify if you qualify for subsidized loans and the amounts offered.
Yes, it is possible to have both subsidized and unsubsidized loans, and many students have a mix of both to cover their college costs.
After you graduate, the interest on unsubsidized loans is added to your principal balance, and future interest is calculated on the new, larger amount.
Yes! If you can, it is highly recommended that you pay off any interest you have on subsidized loans to reduce your debt.
Subsidized and unsubsidized loans: Conclusion
Both subsidized and unsubsidized loans can be crucial tools for financing your education. Prioritize subsidized loans, understand the implications of unsubsidized interest, and make informed borrowing decisions.
