It’s no secret. Student loans can be complicated. There are so many different types of loans, each with their own requirements. It’s probably not realistic that the average borrower will be an expert on all of them. But when it comes to Federal Direct loan programs, it’s important to understand that student loans fall into two main categories — direct subsidized loans and direct unsubsidized loans.
If you’re considering taking out student loans (or maybe you already have), you must understand what these categories mean, and how they differ. The difference between them greatly impacts the amount of interest you’ll end up paying.
What Are Subsidized Loans?
With Subsidized loans, the federal government (The U.S. Department of Education, to be exact) pays the interest on the loan while you’re in school at least half-time, during your grace period (generally, that’s the six months after you finish school), and during any deferments.
Later, you’re responsible for paying the interest on subsidized loans once they enter repayment and if the loan falls into forbearance.
Eligibility Criteria For Subsidized Loans
Subsidized loans are need-based. That means you need to prove that you’re in financial need. You must fill out the FAFSA (The Free Application For Federal Student Aid) to do that. The form has a series of questions you need to answer about your financial situation. Your information determines your eligibility for federal financial aid, including subsidized loans.
Subsidized Loan Borrowing Limits
Dependent students can receive no more than $23,000 total in subsidized loans throughout college. The amounts available vary among your first year, second year, and third year and beyond. This table from StudentAid.gov shows the annual and aggregate limits for subsidized loans.
Year | Dependent Students (except students whose parents are unable to obtain PLUS Loans) |
First-Year Undergraduate Annual Loan Limit | $5,500—No more than $3,500 of this amount may be in subsidized loans. |
Second-Year Undergraduate Annual Loan Limit | $6,500—No more than $4,500 of this amount may be in subsidized loans. |
Third-Year and Beyond Undergraduate Annual Loan Limit | $7,500 per year—No more than $5,500 of this amount may be in subsidized loans. |
Graduate or Professional Student Annual Loan Limit | Not Applicable (all graduate and professional degree students are considered independent). |
Subsidized and Unsubsidized Aggregate Loan Limit | $31,000—No more than $23,000 of this amount may be in subsidized loans. |
The amount of subsidized student loans you can receive is based on your financial need (as demonstrated by your FAFSA) and the federal loan limits, whichever is lower. Your school determines the amount you can borrow.
Benefits of Subsidized Loans
The main benefit of subsidized loans — and it’s a big one —is that the federal government pays the interest on the loan, sometimes for years, which can save you thousands of dollars. The interest is covered when you’re in school and also during your grace period. That’s the first six months after you graduate.
Student loan interest is charged every single day, it’s always adding up. So imagine how helpful it is to have that load off your back when you’re trying to get a job and figure out your post-college life.
The federal government also pays the accrued but unpaid interest on subsidized loans during the first three years of certain loan repayment plans. This includes the income-based repayment (IBR) and pay-as-you-earn (PAYE) plans but not the income-contingent repayment (ICR) plan.
The Saving on a Valuable Education (SAVE) plan has the most generous interest subsidy.
If your monthly payments don’t cover all your accrued interest, the Department of Education will pay the remaining charges. This means your loan balance will never grow as long as you make your payments on time — which can make getting out of debt much easier.
Drawbacks of Subsidized Loans
Subsidized loans can be really helpful if you’re eligible, but not all students are. Plus, the amount you can borrow is limited per academic year. So, even if you qualify for one, a subsidized loan might not get you all the money you need for college.
This should be obvious, but subsidized loans are still loans. You will need to pay them back in full, with the interest that starts accruing once you’re in repayment. So, you must ensure you’re okay with taking ondebt that could last for years. And just like with any loan, late or missed monthly payments will impact your credit score.
What Are Unsubsidized Loans?
By now, you can probably guess what unsubsidized loans are. They’re also federal student loans — but with unsubsidized loans, you as the borrower, are responsible for paying the interest right from the start, during school and your grace periods, as well as deferments and forbearances. Interest starts accruing sooner with an unsubsidized loan, meaning you add more to your balance from the beginning.
You can pay interest as it accrues or defer (delay) paying the interest until the student loan enters repayment. Deferring interest payments might sound great initially, but you’ll get out of debt sooner and pay less in the long run if you start making interest payments earlier.
If you don’t pay the accruing interest, the interest will be capitalizedandadded to the principal loan balance. That means that your interest would accrue interest of its own. This can increase the size of your loan by as much as 10-25%.
Just like all federal student loans, unsubsidized loans have a fixed interest rate. That means you won’t have to worry about rising interest rates.
Eligibility Criteria For Unsubsidized Loans
Unlike subsidized loans, which are need-based, unsubsidized loans are available to all students, regardless of need. You’ll still need to fill out the FAFSA, just like you would, to see if you’re eligible for any form of federal financial aid. Then, your school determines how much you can borrow based on your cost of attendance and the other financial aid you receive.
To qualify for an unsubsidized loan, the borrower must meet the following requirements:
- Be enrolled at least half-time as a regular student at a college or university that is eligible for federal student aid. Some private student loans will be lent to continuing education students who are enrolled less than half-time. For federal student loans and most private student loans, repayment begins six months after the borrower graduates or drops below half-time enrollment.
- Have a high school diploma, GED, or the equivalent (e.g., fulfilling state requirements for homeschool students).
- Be a U.S. citizen or permanent resident (for federal loans).
- Be in good academic standing with at least a 2.0 grade point average (GPA) on a 4.0 scale.
- Make progress toward graduating within 150% of the normal timeframe for your degree. So if you’re in a four-year degree program, you’d need to complete the degree within six years to qualify.
- The borrower must not be in default on a previous student loan.
Unsubsidized Loan Borrowing Limits
Unsubsidized loans generally allow higher loan limits than subsidized loans, letting students borrow more money. Like subsidized loans, unsubsidized loans have an annual loan limit per academic year and an aggregate loan limit, which is the total amount a student can borrow for their education.
Unsubsidized Loans vs. Private Student Loans
If you’re just learning about student loans, here’s where things can get a little confusing. With unsubsidized loans, you’re on the hook to pay all the interest from when your loan is disbursed. But it’s still a federal loan that comes from the government.
Private student loans, which come from banks and other financial institutions, are totally separate from that. The main similarity here is that with private student loans, interest starts accruing immediately and you’re responsible for paying all of it yourself — just like you would be with a federal unsubsidized loan.
However, the process of applying for private student loans is different, and the criteria are different. Private student loans are credit-based and often require borrowers to apply with a cosigner, someone else who is responsible for the loan with them.
If you need money for school and you’re thinking about taking out a loan, you should always start with federal student loans first. They generally have lower interest rates and more flexible repayment options than private student loans.
Benefits of Unsubsidized Loans
You might be thinking, “So why would I want an unsubsidized loan over a subsidized loan? I don’t want to pay all that interest!” And you’d be right. Subsidized loans are better.
However, the main benefit of unsubsidized loans is they’re available to a wider range of students. Subsidized loans are awarded based on financial need. Unsubsidized loans don’t have this requirement, so you can still apply for an unsubsidized loan if you don’t qualify for need-based loans.
Plus, unsubsidized loans generally allow higher loan amounts, which means you can borrow more money if needed.
Drawbacks of Unsubsidized Student Loans
The big drawback with unsubsidized student loans is that they’re more expensive than subsidized student loans. You’re responsible for paying the interest on that loan from day one.
Unsubsidized loans are not the worst loans you can borrow in terms of pure cost and the interest rate that you’ll receive. However, the interest accumulates even before you enter repayment. You have to be really careful about how much you’re borrowing and how much you’ll end up paying back in the long run.
Because you’ll pay more interest for an unsubsidized loan, you should always borrow subsidized loans first if you meet the financial need requirements.
For some students with a financial gap between them and college, an unsubsidized loan might be the only financial aid they receive. That’s why it’s important to understand at least what it means so you can consider your options.
Unsubsidized vs. Subsidized Student Loans
When considering a subsidized or unsubsidized loan, the key differences are the interest, loan limit, and eligibility.
Main Differences Between Subsidized and Unsubsidized Loans
Subsidized | Unsubsidized | |
Interest while in school | Paid by federal government | Borrower responsibility |
Interest during grace period | Paid by federal government | Borrower responsibility |
Interest during deferment | Paid by federal government | Borrower responsibility |
Interest during forbearance | Borrower responsibility | Borrower responsibility |
Eligibility | Based on financial need | Not based on financial need |
Eligible borrowers | Undergraduate students only | Undergraduate studentsGraduate studentsProfessional degree students |
Total loan limit for entire education | $23,000 | $31,000 for dependent undergraduate students$57,500 for independent undergraduate students$138,500 for graduate students |
How Interest Accumulation Works
Interest is like a fee you’re charged for borrowing money, and it accrues (or grows) daily.
Let’s say you took out a $2,000 unsubsidized loan with a fixed interest rate of 4.99% each year, throughout four years of college. If you made no payments during school or your grace period, you’d be looking at a principal balance of $8,000 + over $1,000 in capitalized interest.
Now, let’s imagine you took out $2,000 in subsidized loans each school year. When it came time to start paying those loans back, you’d start with a balance of $8,000 and wouldn’t have to worry about another $1,000 in interest because the government had been paying it while you were in school and during your grace period.
One thousand dollars in interest might not sound too bad—but it’s a lot for just $8,000 worth of loans. And many students need to borrow much more than just $2,000 per year.
Applying For Subsidized and Unsubsidized Student Loans
There are three main steps to applying for a federal student loan.
Step 1: Federal student loans require the student to have filed the FAFSA, even for unsubsidized loans.
Step 2: After submitting the FAFSA, the college financial aid office will send the student a financial aid award letter or notification. This will specify the amount of subsidized and unsubsidized federal student loans for which the student is eligible.
Step 3: After choosing which financial aid to accept, students must complete entrance counseling at studentaid.gov and sign a Master Promissory Note (MPN). Parent borrowers will also need to sign an MPN.
What to Know About Applying for an Unsubsidized Loan
If the student is a first-time, first-year borrower, there may be an automatic 30-day delay before the federal student loans are disbursed.
Funds will be credited to the student’s account at the college and applied first to tuition and fees. If the student lives in college-owned or operated housing, the funds will also be applied to room and board. A credit balance will be refunded to the student within 14 days to pay for other college costs.
Students and parents can apply for private student loans and private parent loans through the private lender’s website.
Strategies for Subsidized vs. Unsubsidized Student Loans
Here are three strategies for responsibly managing subsidized and unsubsidized student loans.
1. Subsidized student loans are less expensive than unsubsidized student loans, so you should always accept subsidized student loans first before considering unsubsidized loans.
2. Remember that an unsubsidized loan of the same amount as a subsidized loan will cost you more in the long run, as you’ll be responsible for paying more in interest. Even if the original loan amount is the same, the two loans are not equal.
3. If you take out an unsubsidized loan, know that the interest starts accruing right away, and it’s best if you can make interest payments throughout school. You always have the option to make payments toward your loan — you don’t need to wait until after school. There’s no penalty for making extra payments or paying off a federal loan early.
The Bottom Line
If you fill out the FAFSA and you’re offered federal aid in the form of subsidized student loans — always accept those first because you won’t pay as much interest as you would with unsubsidized loans. Then if you still need money, you can consider an unsubsidized loan. And if you’re making decisions about which loans to take on and how much, check out our Loan Comparison Calculator to help you make the right decision for you.
Frequently Asked Questions (FAQs)
Are unsubsidized loans good?
Unsubsidized loans are not the worst loans you can borrow in terms of pure cost and the interest rate that you’ll receive. However, the interest accumulates and compounds on top of your loan balance even before you hit repayment. This means you should be mindful of how much you’re borrowing and what you’ll need to repay.
Do you pay back an unsubsidized loan?
Yes, you will always repay an unsubsidized loan. It is a federally-backed loan that goes into repayment when you graduate, start attending school less than half-time, or leave school. When one of those things is triggered, you’ll receive a 6-month grace period to prepare for repayment.
Is it better to accept subsidized or unsubsidized loans?
It’s typically a best practice to accept subsidized loans first because there won’t be as much interest to repay them as unsubsidized loans. It’s best to only accept as much as you need to attend school and to find ways to pay for the rest of your expenses.
