What is the difference between subsidized and unsubsidized loans

By Nooreen B
Modified on April 24, 2023
what is the difference between subsidized and unsubsidized loans

If you are a college student researching your funding options, you will likely come across direct subsidized and direct unsubsidized loans. Both of these loans are federally funded student loan options provided by the U.S Department of Education. 

Direct subsidized loans, also called subsidized loans, are based on the financial need of undergraduate students. They don’t incur interest charges while you are in school for at least a part-time period or during a deferment—a period where you don’t have to make payments due to financial hardship.

While direct unsubsidized loans, also called just unsubsidized loans, can be for undergraduate or graduate students. They are not based on financial need and incur interest as soon as they are dispersed, regardless of enrollment and deferment periods. 

Those are just some of the basics; below, you will find more information on the differences between subsidized and unsubsidized loans. Along with information on interest rates, applying, and repayment. 

More Information on the Differences With Interest Rates for Subsidized vs. Unsubsidized Loans

One of the significant differences between these loans is the interest rates. As mentioned above, with unsubsidized loans, you can pay the interest payments up front or let the loan accrue interest over time. While subsidized loans do not have that option.

Below are the interest rate percentages with both of these loan types (for loans disbursed on or after July 1, 2022, and before July 1, 2023): 

  • Subsidized and Unsubsidized loans for undergraduate students — 4.99% 
  • Subsidized Loans for graduate students — 6.54% 

Keep in mind that if you are a veteran or member of the military, you may be eligible for lower rates.

Other Fees To Think About With Federal Student Loans 

In addition to interest rates, you will also have to pay origination fees for student loans. Any subsidized or unsubsidized loans that are dispersed on or after Oct. 1, 2019, and before Oct. 1, 2020, will have an origination fee of 1.059%. While loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2023, will have an origination fee of 1.057% of the loan amount. 

Repayment for Subsidized vs. Unsubsidized Student Loans

Unsubsidized loan repayment will begin as soon as the funds are disbursed. While subsidized loans begin repayment once you leave school or graduate. Monthly payments depend on interest rates, the amount you borrowed, and your income. 

Subsidized loans can have deferred payments and a six-month grace period after you graduate or leave school. Unsubsidized loan repayment does not include any of those flexibilities. 

When it comes to eligibility for loan forgiveness, the good news is that both subsidized and unsubsidized can be forgiven. Another thing to keep in mind with student loan repayment is the difference between deferment and forbearance with student loans. Forbearance—another form of pause, similar to deferment for student loans—will mean accrued interest over the forbearance period for all loan types. If you are having trouble repaying your student loans you can consider forbearance, deferment, refinancing your student loans, or applying for an income driven repayment plan.

Will I Be Eligible for These Loans?

As you know now, subsidized loans are available to borrowers that demonstrate financial need. The good news is that there is no income cutoff. Eligibility depends on how much you or your family can contribute to schooling. In most cases, your school will provide you with an estimate of what you will receive. 

To be eligible for these federal loan options, you must: 

  • Be a U.S. citizen or permanent resident.
  • Have not defaulted or owe a refund to any previous aid program.
  • Have enrollment for at least half-time each semester.
  • Maintain satisfactory academic progress.

There are some requirements that your school must also fulfill if you are seeking a subsidized or unsubsidized loan: 

  • Your school must be enrolled in a federal direct loan program to be eligible for federal student aid. 
  • Your school must have programs that offer degrees or certificates, which you will need to be enrolled in. 

How Much Can I Borrow With Subsidized and Unsubsidized Student Loans?

The amount of money you can borrow from unsubsidized or subsidized student loans will depend on various factors. First and foremost, the school you plan to attend will determine the amount of financial aid you can receive. Some schools do not allow any federal student loans, so you may want to consider alternative colleges,  if these loans are necessary for your education. 

If your college or university is enrolled in a direct loan program/allows students to use these loans, then there are a few limitations to keep in mind: 

Annual Loan Limits

These limit the loan amounts you can take out each academic year. These limits will be different for independent and dependent students. Here are the annual loan limits to consider: 

Annual Loan Undergraduate Students Who Are Dependents: 
  • 1st-year undergraduate students — $5,500 (up to 3,500 of this can come from subsidized loans)
  • 2nd-year undergraduate students — $6,500 (up to $4,500 of this can come from subsidized loans) 
  • 3rd year and beyond undergraduate students — $7,500 (up to $5,500 of this can come from subsidized loans) 

One thing to keep in mind is that if you are a dependent student whose parents are ineligible for Direct Plus Loans (federally-funded student loans that parents can take out for their students), you may be eligible for additional unsubsidized loans.

Annual Loan Limits for Undergraduate Students Who Are Independent:
  • 1st-year undergraduate students — $9,500
  • 2nd-year undergraduate students — $10,500
  • 3rd year or beyond undergraduate students — $12,500

The amount limits that can come from subsidized loans are the same for dependent students. 

Graduate Student Annual Loan Limits 

$20,500, which can only come from unsubsidized loans. 

Aggregate Loan Limits

Aggregate loan limits are the total you can borrow during your education. For undergraduate students, there is a limit of $31,000 for dependents and $57,500 for independent students—up to $23,000 of this amount may be in subsidized loans. While for graduate students, the aggregate limit is $138,500 for graduate or professional students.

If you are pursuing your education and reach your aggregate loan limit, you will be unable to borrow more from subsidized and unsubsidized loans. However, if you repay any amount, you will be able to borrow more, again up to that aggregate loan limit. You may receive more than the aggregate limit for specific graduate programs like health care. 

How Do I Apply for Subsidized or Unsubsidized Loans?

To apply for these federal student loans, you need first fill out a FAFSA application. To do so, you will need some information: 

  • Your federal income tax returns, W-2s.
  • Your School’s Name or FAFSA code. 
  • Your Social Security Number
  • Your Alien Registration Number (if you are not a U.S. citizen).
  • Bank statements and records of investments (if applicable).
  • Records of untaxed income (if applicable).
  • An FSA ID to sign electronically (which you can create on the FAFSA website).

Once you submit your application, your school’s financial aid office will tell you how much you can receive. 

If you accept your loan amount, you will have to complete Entrance Counseling and a Master Promissory Note. Entrance Counseling explains interest and repayment terms, while the Master Promissory note is a legal document that you sign that states a promise for repayment. Whatever loan amount you get will be distributed to your school, which will then send that money to you. 

Which Is Better: A Subsidized or Unsubsidized Loan?

If you qualify for a subsidized loan, it is usually always the better option than unsubsidized loans. You will have more flexibility, the subsidized loan will likely have less interest incurred, and you don’t have to worry about paying anything back until you are done with school.

Federal Student Loans vs. Private Student Loans

Student borrowers have two main choices when applying for student loans, they can go to the federal government or private lenders. Private loans like credit cards, payday loans online, or even private student loans may seem less complicated. However, the better choice for student loan funding are federal loan options. Federal direct loans offer lower interest costs, don’t rely on credit history, offer income-driven monthly payments, and more flexibility in general. 


Subsidized and Unsubsidized Loans | Federal Student Aid
What will I need to fill out the FAFSA? | Federal Student Aid

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