What’s the Difference Between Subsidized and Unsubsidized Loans?

The two main types of federal student loans are Direct Subsidized loans and Direct Unsubsidized loans. Subsidized loans are only available to undergraduate students with financial need, and their terms are better than Unsubsidized loans. However, you can’t borrow as much with a Subsidized loan.

Since Subsidized loans are only available to those with financial needs and in smaller amounts, many students use both types of federal student loans. We’ll help you understand the difference between Subsidized and Unsubsidized student loans, when each is right, and how to apply.

What are Subsidized student loans?

Subsidized federal student loans are for undergraduate students with demonstrated financial need. The goal of Subsidized loans is to make college more affordable for students who might otherwise find it too expensive. As such, Subsidized loans have better terms than Unsubsidized loans. 

Each year, you must apply online for federal student loans by submitting a Free Application for Federal Student Aid (FAFSA) form to the federal government. Your school’s financial aid office uses information from the FAFSA form to evaluate your Subsidized loan eligibility and determine your financial need.

Your financial need equals the difference between your school’s cost of attendance and your expected family contribution. 

• Cost of attendance (COA): The COA estimates how much it costs to attend your school. It includes estimated costs for tuition and fees, living expenses, books, and other supplies.
• Expected family contribution (EFC): Your EFC is calculated based on the information you report in the annual FAFSA form. It includes your family’s size, income, assets (e.g., cash), benefits (e.g., unemployment), and how many people are in college.

For example, let’s say your estimated COA is $26,000, and your EFC is $23,000. You’re eligible for no more than $3,000 in annual Subsidized student loan funding ($26,000 – $23,000). 

As we noted, the goal of Subsidized loans is to make college more affordable for eligible students. So the federal government pays the interest that accrues on Subsidized student loans while you’re enrolled at least half-time, for six months after you graduate, and during periods of deferment. 

What are Unsubsidized student loans?

Unsubsidized student loans are available to any undergraduate or graduate student enrolled in school at least half-time, regardless of whether they have financial need. The amount you can get is based on the COA at your school and how much other financial aid you receive.

The most significant difference is the federal government does not pay interest on Unsubsidized loans during school or the grace period. Instead, interest accrues unless you pay it, and it’s capitalized—added to the loan balance—once repayment begins. 

Since you’re responsible for paying accrued interest on Unsubsidized student loans, the total cost of borrowing over the life of the loan is higher than on Subsidized loans, even if the interest rate is the same on both loans. 

Subsidized vs. Unsubsidized student loans

You can see a side-by-side comparison of Subsidized and Unsubsidized student loans below.

	Subsidized loans	Unsub. loans
Undergrads eligible?	✔️	✔️
Grad students eligible?	❌	✔️
Must have financial need?	✔️	❌
Min, enrollment	At least half-time	At least half-time
Undergrad. annual limit	$3,500 year 1; $4,500 year 2; $5,500 year 3 and beyond	$9,500 year 1; $10,500 year 2; $12,500 year 3+
Grad. student annual limit	Not applicable	$20,500
Origination fee?	✔️	✔️
Rates	4.99%	4.99% undergrad; 6.54% for grad.

Are there repayment differences between Subsidized and Unsubsidized student loans?

The main repayment difference between Subsidized versus Unsubsidized student loans is the interest you’ll accrue. 

You won’t accrue interest when you’re enrolled at school at least half-time and during the six-month grace period for Subsidized loans. Interest accrues on Unsubsidized loans.

For example, you can see in the table below the total borrowing cost is $990 more for an original $5,500 Unsubsidized loan than an otherwise equal Subsidized loan. You would accrue $436 in interest on the Unsubsidized loan before repayment starts and pay $4.62 in extra interest every month thereafter.

	Subsidized loan	Unsubsidized loan
Original loan amount	$5,500	$5,500
Interest rate	4.99%	4.99%
Repayment term	10 years	10 years
Accrued interest (12 months in school, 6 month grace period)	None	$436
Final loan amount	$5,500	$5,936
Monthly payment	$58.31	$62.93
Total borrowing cost	$6,997	$7,987
Borrowing cost difference	—	$990

Can I choose whether I get Subsidized loans or Unsubsidized loans?

Your school’s financial aid office will offer you the federal loan types and amounts for which you’re eligible. 

If you’re eligible for Subsidized loans, you’ll choose how much of these loans you get first. Once you’ve used all the Subsidized funds, you can get Unsubsidized loans up to their limits. 

Remember: Subsidized loans are only available to undergraduate students with financial need. Graduate students can’t get Subsidized loans. Your financial aid advisor will share your federal loan options so you can choose the right type of loan and amount of funding.

Which is right for you?

Many students get a combination of Subsidized and Unsubsidized federal student loans. Start by getting as much subsidized funding as you’re eligible for and need. If you need more funding, use Unsubsidized loans up to their limits.

Subsidized federal student loans are the best option if they’re available to you because the federal government pays for the accrued interest while you’re in school and during periods of deferment, saving you money in the long run.

Interest accrues on Unsubsidized loans while you’re in school, but these student loans often cost less than private student loans. Plus, you can use federal loan benefits such as income-driven repayment options, deferment, and forbearance. Unsubsidized loans are still a favorable student loan option.

Regardless of whether you choose a Subsidized or Unsubsidized loan, federal student loans come with many benefits private student loans don’t offer.

How to apply for Subsidized and Unsubsidized student loans

Applying for federal student loans is the first step toward knowing what you’re eligible for through Subsidized, Unsubsidized, or a combination of federal financial aid. The application process begins with completing the FAFSA form online.

Even if you’re unsure whether you want to get a loan to pay for college, make sure to complete the FAFSA form as soon as possible each year. Not only is the FAFSA used to evaluate your federal financial aid eligibility, but many colleges and states use it to award scholarships, grants, and other loans.

The FAFSA requires details about your residency, college, dependency status, and financial situation. About a month before the new academic year, your school’s financial aid office should share the amount and types of federal financial aid you can get, including loans and grants.  

To meet the federal student loan deadlines, you can complete the FAFSA as soon as October 1 and as late as June 30 for the upcoming academic year. The earlier you submit the form, the more likely you are to qualify for grants and scholarships with limited availability or funding.