What’s the Difference Between Subsidized and Unsubsidized Loans?
Subsidized student loans are offered to those with financial need and the government pays the interest while students are in school and during periods of deferment. All other loans are unsubsidized and the government does not pay any interest.
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Each year, the cost of earning a college degree from either in-state or out-of-state colleges increases, regardless of the student’s financial means or dependency. Most students need a way to help pay for these rising expenses each year because they often can’t be covered by savings alone.
Federal student loans are the most common solution for financing education because they do not require a credit check or an established credit history to qualify.
Under the federal student loan program, borrowers may qualify for Direct Unsubsidized Loans and/or Direct Subsidized Loans. These loan types have significant differences that can have an impact on a student’s repayment once their college time ends. It is helpful to know these differences, how one qualifies for each type of loan, and the process for applying for federal loans for when the time comes.
On this page:
- Subsidized vs. Unsubsidized Student Loans
- What Are Subsidized Student Loans?
- What Are Unsubsidized Student Loans?
- Which is Right For You?
- Applying for Federal Student Loans
- Federal Student Loans vs. Private Loans
Subsidized vs. Unsubsidized Student Loans
You can see a side-by-side comparison of subsidized and unsubsidized student loans below.
| Subsidized Student Loans | Unsubsidized Student Loans | |
| Who is Eligible | Undergraduate students | Undergraduate and gradate students |
| Loan Limits | $3,500 the first year $4,500 the second year $5,500 the third year $5,500 the fourth year | $9,500 the first year $10,500 the second year $12,500 the third year and beyond $20,500 each year for graduate students |
| Qualifications | Financial need | Attend school at least half-time |
| Fees | Origination fee | Origination fee |
| Interest Rates | The rate paid by borrowers is 5.05% | The rate paid by undergraduates is 5.05% and 6.60% for graduates |
What Are Subsidized Student Loans?
Subsidized federal student loans are offered with better terms than unsubsidized loans. With subsidized loans, the federal government pays the interest that accrues on the loan while you are in school at least part-time, for the first six months after you graduate, and during periods of deferment.
This benefit can be valuable over the long haul, as it reduces the total cost of your loans.
The school you are attending and your financial need dictates the total amount you can borrow through subsidized loans, although the total amount cannot exceed your financial need.
What Are Unsubsidized Student Loans?
Unsubsidized loans differ from subsidized loans in that there is a financial need requirement in order to qualify. The federal government allows anyone attending an undergraduate or graduate degree program to receive unsubsidized loans, up to the annual and aggregate loan limits. The total amount of unsubsidized loans is still based on the school you are attending, your cost of attendance, and the amount of other financial aid received.
The most significant difference with unsubsidized loans is that the federal government does not pay any of the interest on the loans during school or the grace period. Instead, interest accrues unless it is paid and it is capitalized or added to the loan balance once repayment begins. This can increase the total cost of borrowing over the life of the loan.
Which is Right For You?
When possible, subsidized federal student loans are the best option for borrowing for your education through the Department of Education. This is because the government pays for interest during school and periods of deferment which can help you save.
However, you must be an undergraduate student to qualify, and you must be able to show financial need. It is also important to note that only a small amount of your loans can be subsidized, meaning unsubsidized funding may be a part of your total student loan picture.
With that being said, unsubsidized loans are not necessarily a bad choice. The interest rate on these loans is often lower than on comparable private student loans.
Also, there is no need to qualify based on credit score and you do not need to have an income to receive approval for an unsubsidized loan. Also, these are the only types of loans available to graduate and professional students using the federal government financing options.
Applying for Federal Student Loans
Applying for federal student loans is the first step toward knowing what you can receive through subsidized, unsubsidized, or a combination of federal financing. The application process begins with completing the Free Application for Federal Student Aid, known as the FAFSA.
This is done easily online, and it requires you to provide information about your residency, your college of choice, your dependency status, and your financial situation. Based on these details, your school and the federal government will determine what type of financing you are eligible for and in what amount.
Federal Student Loans vs. Private Loans
Although federal student loans are the most common source of education funding for students, there are alternatives in the form of private student loans. Private lenders, unlike the federal government, offer loans based on your risk as a borrower.
You must complete an application that shows your financial ability to repay the loan, your credit history and score, and in some cases, your income.
If you cannot meet the requirements of a private student loan on your own, you may have an opportunity to add a cosigner to the loan to strengthen the application. Private student loans may be beneficial because they can often cover more than the loan limits of federal student loans. However, there is no option for subsidized loans with private lenders.
Bottom Line
Both Subsidized and Unsubsidized Direct Loans, sometimes referred to as Stafford Loans, can be beneficial in covering your cost of attendance. It is important to recognize the differences between the two federal loan types, as well as your options for private student loans before making a decision on which funding you will receive.
Be sure to check your eligibility requirements before submitting the FAFSA or a private student loan application, and know your strategy for covering interest accruals while in school.
