Understanding Federal Student Subsidized vs Unsubsidized Loans
As you look at how your family will afford to send your children to college, loans of some sort may be a consideration. Loans are available for students as well as parents, and can be a significant help in paying for school.
Student loans can come from the government or private lenders. Some loans from the government are subsidized, depending on your family’s financial need.
It’s vital to understand the different types of loans and the differences between subsidized and unsubsidized loans to make the right choice for your family financially.
What’s the Difference Between Subsidized and Unsubsidized Loans
What Is a Subsidized Loan?
A subsidized loan is only available to undergrads through the Federal Direct Loan Program. They are called “subsidized” because interest is paid by the government while the student is in school.
The interest rates are fixed for the life of the loan, and are set by the government.
A student does not need to demonstrate a specific income or credit score to qualify. Instead, students fill out the Free Application for Federal Student Aid (FAFSA) to apply for these loans. Eligibility is based on financial need.
The government covers the interest on subsidized loans as long as the student is enrolled at least half-time, and during periods of deferment or forbearance after graduation.
No payments are due on subsidized loans until six months after graduation.
Unfortunately, graduate students and parents of students do not qualify for this type of federal loan.
In addition, students who can’t demonstrate financial need won’t be awarded subsidized loans. As of the 2019-2020 school year, the total amount for subsidized loans is capped at $23,000 for the full span of an undergraduate’s education.
When comparing subsidized vs. unsubsidized loans, you’ll find that subsidized loans are less expensive although the amount a student can borrow is limited.
What Does an Unsubsidized Loan Mean?
Most other educational loans are unsubsidized. The Federal Direct Loan program offers unsubsidized student loans; PLUS and private loans are also not subsidized.
With an unsubsidized student loan, the borrower is responsible for making interest payments as soon as the loan is issued.
This could mean paying interest payments during school, or it could mean adding those interest payments to the principal of the loan, to be repaid after graduation.
Direct Unsubsidized Loans are not based on financial need, and are available to graduate students as well as undergraduates. They have fixed interest rates, and students need to fill out the FAFSA to apply.
The aggregate cap for Direct Unsubsidized Loans is $31,000 total. Interest is due immediately, even during the post-graduate grace period and during deferment or forbearance, although it can be added to the principal instead of being paid right away.
Other unsubsidized loans have their own terms and conditions.
PLUS loans are also through the federal government, and private loans are available from a variety of lenders.
In all cases, however, you will find the interest either due during school or added to the balance of the loan and due during repayment.
How Do You Qualify for a Subsidized Student Loan?
In order to qualify for a Direct Subsidized Loan, you must first file the FAFSA to apply for financial aid through your school.
After applying, the school will determine if your family qualifies for need-based financial aid.
To be eligible for a subsidized loan, you must:
- Be an undergraduate student.
- Be able to prove financial need.
- Be enrolled at a school at least half-time.
- Be enrolled in a program that can lead to a degree or certificate awarded by the school.
What’s important to understand is how colleges determine need and need-based financial aid awards.
The college must first determine that you have financial need. This is based on your expected family contribution (EFC) and the cost of attendance at the school.
If your EFC is less than the school’s cost of attendance, your financial need is the difference of the two.
How Much in Subsidized Loans Can You Get?
We often hear from parents in Road2College’s Paying For College 101 Facebook group, asking why one school offered their child a subsidized student loan and another school didn’t.
It’s because students qualify for need-based aid if their expected family contribution won’t cover the cost of attendance at a particular school, and this varies school to school depending on the school’s cost of attendance.
For example, if the school’s cost of attendance is $30,000 and your expected family contribution is $18,000, your financial need is $12,000.
The school may use other grants, scholarships, and need-based aid to help cover your child’s financial need. If after applying whatever need-based monies a school offers your family still has financial need, the school will offer the difference as a subsidized student loan.
Taking the above example further, an example family has a financial need of $12,000. The school offers the student a scholarship worth $8,000.
Even with the scholarship, the remaining financial need is still $4,000. The school will now offer the maximum they can of a subsidized loan and offer the rest as an unsubsidized loan (up to the maximum allowed per school year).
For the example family with a financial need of $12,000, the school offers $8,000 as a scholarship and then the maximum the school can offer is $3,500, in a subsidized loan. Since every freshman is allowed to borrow up to $5,500 in federal student loans, in our example family, the student can also borrow $2,000 in unsubsidized loans, if needed.
As a freshman, students can take out no more than $3,500 in subsidized direct loans. While the amount gradually scales up to $5,500 a year for juniors and seniors, the lifetime limit on a Direct Subsidized Loan for undergraduates is $23,000.
Why Choosing a Subsidized Student Loan Is Important
If your student is an undergraduate, it’s vital that they prioritize subsidized loans to save money on school. Not only is the interest taken care of—which can save thousands of dollars— but the fixed interest rates are lower.
Other students and borrowers may have fewer choices when it comes to subsidized vs. unsubsidized loans.
A Federal Direct Unsubsidized Loan has a lot of advantages over other types. Financial need is not required, and the fixed interest rates are still lower than most private loans.
Private loans are probably the last type of funding to consider.
Banks require specific creditworthiness, and do not offer the same flexibility with repayment plans, forbearance, and other terms.
Even if the private loan interest rate seems lower to start with, some can be variable, which means they can go up significantly over time.
Should You Make Interest Payments While in College?
Those students utilizing the Federal Unsubsidized Loans often ask whether it is a good idea to begin making payments while the student is in school rather than waiting until the required payments start.
The answer is yes, if they can manage it financially.
The analysis below shows how making voluntary payments early will effect the borrower’s bottom line.
This analysis assumes that your student is taking the full loan all four years of college, it assumes that the loans are disbursed at the beginning of each semester, and it also assumes an average interest rate of 4.5 percent.
This chart shows the difference between making monthly interest-only payments, quarterly interest-only payments, an annual interest-only payment, and making a payment larger than the interest amount.
Comparison of Loan Repayment Schedules While In College
Loan Amount Dispersed
Accumulated Interest Interest Paid Principal Paid 4 Year Loan Balance
No Interest Paid
$27,000 $2,360.26 $0 $0 $29,360.26
Interest Only Payment Once Per Month $27,000 $0 $2,232.19 $0 $27,000.00
Interest Only Payment Once Per Quarter $27,000 $0 $2,240.42 $0 $27,000.00
Interest Only Payment Oncer Per Year $27,000 $0 $2,270.37 $0 $27,000.00
$100 Payment Every Month
$27,000 $0 $1,968.25 $2,531.75 $24,468.25
Detailed analysis . . .
The above analysis assumes all loans are unsubsidized and half is disbursed at the beginning of each semester: freshman year loan: $5,500, sophomore year loan: $6,500, junior year loan: $7,500 and senior year loan: $7,500 for a total of $27,000 disbursed. Assumes a 4.5 percent fixed interest rate for the entire four years. Analysis provided by Pamela Heestand, a member of the Paying For College 101 Facebook group.
How Else Can You Save Money on College?
Choosing the right loans and understanding the entire process are major steps in saving money on college.
However, they’re only one part of making sure your student has the best (and most affordable) college experience possible.
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