What is the difference between subsidized and unsubsidized loans?

what is the difference between subsidized and unsubsidized loans

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. 

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. 

Those are just some of the basics; below, you will find more information on what is the difference between a subsidized and unsubsidized loan. 

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%1 
  • Subsidized Loans for graduate students — 6.54%1 

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.1 

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 private 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 who 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 a 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 is 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. 

Additional Information on the Difference Between Direct Subsidized Loans vs. Unsubsidized Student Loans 

Feature/Aspect Subsidized LoanUnsubsidized Loan
Loan Availability Primarily available to undergraduate students. Available to undergraduate, graduate, and professional students. 
Credit Check Requirement No credit check is required. No credit check is required. 
Effect on Credit Score No direct effect unless defaulted. No direct effect unless defaulted. 
Tax Deductibility of Interest Interest paid can be tax-deductible. Interest paid can be tax-deductible. 
Use of Loan AmountCan be used for tuition, fees, room, board, and other school-related expenses. Can be used for tuition, fees, room, board, and other school-related expenses. 
Availability for Non-degree Programs Generally not available. Available if the program is eligible for federal student aid. 
Loan Disbursement Directly disbursed to the school, excess funds returned to the student. Directly disbursed to the school, excess funds returned to the student. 
Impact of Changing Schools Loan can be deferred, but eligibility must be re-evaluated at the new school.Loan can be deferred, but eligibility must be re-evaluated at the new school. 
Availability for Part-time Students Available, but must be enrolled at least half-time. Available, but must be enrolled at least half-time. 
In-school Interest Subsidy for Graduates Not available. Not available. 
Disclaimer: The information provided in the above table is for general informational purposes only and should not be considered financial advice. The details are subject to change based on amendments in federal policies, regulations, or laws. Borrowers are advised to consult with a financial advisor or visit the official Federal Student Aid website for the most accurate, up-to-date, and comprehensive information regarding subsidized and unsubsidized loans.

FAQ: Unsubsidized vs. Subsidized Student Loans 

What is the primary purpose of offering a Subsidized loan by the federal government?

The primary purpose of a Subsidized loan is to assist students with financial need in affording their higher education. The federal government covers the interest payments while the student is in school, making it a more affordable option.

How does the Federal Student Aid Office determine the amount I can borrow with a Subsidized vs. unsubsidized student loan?

The Federal Student Aid office determines the amount based on your year in school, dependency status, and the total cost of attendance. While both loans consider these factors, subsidized loans also factor in financial need.

Can I have both a Subsidized and an Unsubsidized loan at the same time?

Yes, many students have both types of Federal student loans simultaneously, but the total amount borrowed cannot exceed the annual loan limits set by the Federal Student Aid Office.

How does Student loan debt from Subsidized loans differ from that of Unsubsidized loans in the long run?

Student loan debt from Subsidized loans might be lower in the long run since the federal government covers the interest during school and deferment periods. In contrast, unsubsidized student loans will accrue interest from day one, which can increase the total debt over time.

Are there any specific courses or majors that are ineligible for Federal loans?

Generally, eligibility for Federal loans is not based on the course or major but on the school’s accreditation and participation in the Federal student aid program. However, always check with your school’s financial aid office for specifics.

How do Federal loans differ from private student loans in terms of borrower protection?

Federal loans, both Subsidized and Unsubsidized, come with borrower protections like loan deferment, forbearance, and access to income-driven repayment plans. These protections might not be available with private loans.

If I previously declined a Federal student loan, can I change my mind and accept it later?

Yes, if you initially decline a Federal student loan, you can later contact your school’s financial aid office to accept it. However, there might be deadlines, so it’s essential to act promptly.

How does the interest rate on a Subsidized loan compare to that of an Unsubsidized loan?

Both Subsidized and Unsubsidized student loans have interest rates set by the federal government. While the rates might be similar, the key difference is when interest starts accruing.

What happens if I default on my Federal student loan?

Defaulting on a Federal student loan can have serious consequences, including damage to your credit score, wage garnishment, and withholding of tax refunds. It’s crucial to contact your loan servicer if you’re having trouble making payments.

Can I consolidate my Subsidized and Unsubsidized student loans into one loan?

Yes, you can consolidate multiple federal student loans, including Subsidized and Unsubsidized loans, into a single Direct Consolidation Loan. This can simplify repayment and extend the repayment term.

A Word From CreditNinja on Student Loans 

Thousands of students take out student loans every year, so it’s important to know the ins and outs of this type of funding. Thankfully, CreditNinja has tons of information about handling student loans, creating a budget, building credit as a college student, getting bad credit loans, installment loans, and more. Learn more by checking out the CreditNinja dojo!  

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

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