When it comes to student loans, one of the questions we’re asked most often is: What’s the difference between subsidized vs. unsubsidized loans?
There are a number of types of student loans out there from private to federal. Direct Loans are a type of federal loan and a popular option. These loans are made directly by the U.S. Department of Education and they have fixed interest rates. The two main types of Direct Loans are Subsidized Loans, and Unsubsidized Loans.
Student loan experts agree that it’s best to use federal loans before borrowing private student loans, which often have higher interest rates and need a cosigner for students with no credit history.
While both subsidized and unsubsidized loans are federal options, they have different eligibility requirements.
Here is an overview of subsidized and unsubsidized federal student loans, along with their differences.
| | $3,500 for first year $4,500 for second year $5,500 for third year $5,500 for fourth year | $5,500 for first year $6,500 for second year $7,500 for third year $7,500 for fourth year |
| Financial need | Attend school at least part-time | |
| | 1.057% | 1.057% |
| | 4.99% (doesn't accrue until after no longer enrolled part-time) | 4.99% (accrues immediately after disbursement) |
A subsidized loan is a federal student loan to help students with financial need pay for college. It is awarded based on financial need as determined by the Free Application for Federal Student Aid (FAFSA).
A key characteristic of subsidized loans? Unlike other loans, interest doesn’t accrue while the student is in school at least half-time, during the six-month grace period after graduating college, and during any periods of deferment. This helps students save money.
Schools determine how much students can borrow based on the cost of attendance, financial need, year in school, and other financial aid received. There are yearly loan limits schools can award in subsidized loans (see chart above). In total, borrowers can take out a maximum of $23,000 in subsidized loans during their education.
Unsubsidized loans are available to all undergraduate and graduate students who complete the FAFSA. There is no financial need requirement.
Students are not required to make payments while in school, however interest will start accruing on the loan once it’s disbursed to the school. If students choose not to pay the interest while in school or during grace periods and deferments, the interest will accumulate.
Unsubsidized loans do have a higher yearly loan limit than subsidized ones (see chart above). Dependent undergraduate students can borrow up to a total of $31,000 in federal loans (both subsidized and unsubsidized combined) during the course of their education. Graduate students can borrow $20,500 in unsubsidized loans annually, up to a maximum total of $138,500.
Undergraduate students who can show exceptional financial need are eligible for subsidized loans. Financial need is determined by FAFSA forms. Graduate students do not qualify for subsidized loans.
Unsubsidized loans are available for undergraduate and graduate students, regardless of financial need.
For both subsidized and unsubsidized loans, students need to fill out the FAFSA. After that, student information is sent to the colleges, and each college’s financial aid office uses the information from the FAFSA to determine if the student qualifies for subsidized loans.
The federal interest rate for undergraduate students taking out subsidized and unsubsidized loans for the 2022-2023 academic year is 4.99%*. Subsidized loans don’t start accruing interest until after a student is no longer enrolled at least part time.
For graduate students, the federal interest rate for unsubsidized loans is 6.54%*. Interest rates are set each year, and the rate remains fixed for the duration of a loan’s life.
All federal loans also include an origination fee, which is taken out of the loan before it’s disbursed to the school. The origination fee for all subsidized and unsubsidized federal loans is 1.057%**.
*Interest rates listed are for the 2022-2023 academic year and will apply to any loan disbursed on or after July 1, 2022 and before July 1, 2023. Rates for the next academic year are typically released each June.
**Origination fee listed is for loans disbursed anytime between October 1, 2020 to October 1, 2023. Any changes to the origination fee will be announced before October 1 each year.
Students who have subsidized and/or unsubsidized loans have a six-month grace period after graduation. Once the grace period ends, borrowers typically make monthly payments on their loans.
Borrowers with subsidized and/or unsubsidized student loans have more repayment options than private loans and are eligible for income-driven repayment plans after graduation.
Income-based repayment sets payments at 10-15 percent of a graduate’s monthly discretionary income. Repayment can be stretched out for 20-25 years. While income-based repayment lowers the monthly payments, the longer it takes graduates to pay back their loans, the more they will pay in interest.
Both subsidized and unsubsidized loans can help students attend college.
If an undergraduate student qualifies for a subsidized loan, it’s the better option financially since there is no interest charged while they’re in school, or during the grace period. Paying off unsubsidized loans can take longer because the interest starts to accumulate right away.
For those who can show financial need, subsidized loans have better terms. But because the limit on subsidized loans is low, borrowers will likely have to take out other loans.
Subsidized loans are only available for undergraduate students, and not all students will qualify for them financially.
Unsubsidized loans can help students regardless of financial background. It’s important to remember that while interest starts to accrue on unsubsidized loans immediately, it’s still likely a lower interest rate than a private student loan and students don’t need a cosigner to borrow. Additionally, private loans don’t have the same protections and repayment options that federal loans do, such as loan forgiveness and deferment.
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This story was first shared in our Paying for College 101 Facebook community. It’s been edited for clarity and flow.
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