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Subsidized vs. Unsubsidized Loans? [DIFFERENCES EXPLAINED]

Subsidized vs. Unsubsidized Loans? [DIFFERENCES EXPLAINED]

Are you considering federal student loan options to fund your college education? Two primary loan categories you'll come across are subsidized and unsubsidized loans, but which one is right for you? And what's the difference anyway?

Subsidized loans don't accrue interest when you're in college at least half-time or when loan payments are deferred, whereas unsubsidized loans start incurring interest immediately. However, there are other differences to consider.

Since the loan you choose affects what you owe after graduation, we'll break down what you need to know about funding your education with a federal student loan so that you can make the best decision for your situation.

Before we dive in, it's important to note that both subsidized and unsubsidized loan offerings are part of the federal government's Direct Loan Program. Your school will send you a financial aid award letter after you send in a Free Application for Federal Student Aid (FAFSA). This letter explains what kind of aid you're eligible to receive. It also indicated your borrowing limit.

With that said, let's explore these two main loan categories.

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What Does Subsidized Loan Mean?

In layman's terms, subsidized means to aid with public money. So, what does subsidized mean for student loans?

A subsidized loan (also referred to as a Subsidized Stafford Loan) is a student loan where the federal government (specifically, the U.S. Department of Education) funds the interest on your loan during three key periods:

  • while you're attending school,
  • during a six-month post-graduation grace period,
  • and in instances where your loan is deferred (i.e., you've attained a temporary postponement on loan repayments).

These loans are only available to undergraduate students with financial needs, which is determined by the cost of attendance minus your expected family contribution and any financial aid, such as scholarships and grants. Cost of attendance includes tuition and enrollment fees, textbooks, school supplies, room and board, and other eligible expenses related to acquiring your education.

In your first year of college, you can borrow up to a maximum of $3,500. That amount increases to $4,500 in your second year of school and $5,500 the year after. The loan amount cannot be more than your financial need.

Since these loans don't accrue interest during certain timeframes, they are cheaper than many other types of student loans. However, you should also understand the requirements for qualifying when seeking to understand something like, "what does direct subsidized loan mean?"

Qualification Requirements For A Subsidized Loan

Unfortunately, a subsidized loan is not for everyone, and you must meet certain criteria to be eligible. What are those criteria?

  • You must be a U.S. citizen or an eligible noncitizen.
  • You must have a valid Social Security number.
  • You must be an undergraduate student.
  • Your educational program must result in a degree or certificate awarded by the school.
  • You must be enrolled at least half of the time. (This means you need to take a minimum of six credits each semester.)
  • You must be able to prove financial need.
  • You may not borrow more money than needed to cover the cost of your degree.
  • You must maintain a satisfactory level of academic progress.
  • You may not have federal student loans in default.
  • You may not have an outstanding balance on a federal student grant.
  • You must show you're qualified to receive a college or vocational education.

If you meet these application requirements, fill out and submit a FAFSA form. Send in your application early since aid is awarded on a first-come, first-served basis. To ensure you don't miss out on funding, pay attention to application deadlines. Forms must be submitted by June 30, 2023, for the 2022-2023 school year.

But is a subsidized loan worth it?

Pros And Cons Of A Subsidized Loan

Subsidized loans offer some great benefits.


  • Since the federal government pays the interest during certain periods, you save money in the long run.
  • Interest rates are usually lower on subsidized loans compared to most private options.
  • Interest rates are fixed, so you won't pay more as you would with loans that have fluctuating interest rates.
  • You'll have flexible repayment options, which isn't something you'll find with private loans. In addition, you can opt for an income-driven repayment plan.
  • A credit check is not required for these loans, unlike private loans.
  • There aren't any prepayment penalties.
  • You're eligible for forbearance and deferment should you need it.
  • You may be eligible for loan forgiveness based on whether you become a public servant such as a teacher, military service member, healthcare worker, or another type of government employee.

However, this type of loan also has a few drawbacks.


  • The federal government caps the amount you can borrow each year, as well as in total. The amount is determined based on your financial needs, federal limits, and your year in school. If you need more than the stipulated maximum, you'll likely need to apply for unsubsidized loans or loans from private lenders to cover the shortfall.
  • You must demonstrate your financial need to be eligible. If your parent's income (if you're a dependent) or your income is too high, you might not be eligible.
  • These loans are only available for undergraduate students, so graduate students will need to seek other sources of funding.

What Does Unsubsidized Loan Mean?

Unlike subsidized loans, unsubsidized loans start accumulating interest from the instant the money is disbursed. In addition, as the borrower, interest payments are your responsibility. Although you can decide to hold off on making interest payments until you've finished school and passed the six-month grace period, the accumulated interest will be added to your total balance. Therefore, you'll be paying interest on interest—an unfavorable financing option, especially if you're going through financial hardship.

The good news is unsubsidized loans are available to undergraduate and graduate students, opening the door for further education to more people. There's also no requirement to prove financial need. Your school will determine your qualifying loan amount based on the cost of attendance and any scholarships and grants you may have received.

How much can you borrow?

The maximum undergraduates can borrow for direct unsubsidized loans ranges from $5,500 to $12,500, depending on dependency status and year in school. Graduate students, as well as professional students, have an annual loan limit of $20,500.

When it comes to unsubsidized student loans, you have several choices:

  • Direct Unsubsidized Loans
  • Unsubsidized Federal Stafford Loans
  • Federal Perkins Loans
  • Health Education Assistance Loans
  • Direct PLUS Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program

You'll need to do your due diligence on each type to figure out which is right for you.

So, what makes you eligible?

Qualification Requirements For An Unsubsidized Loan

Eligibility requirements are less stringent in that you don't need to prove financial need for an unsubsidized loan. However, the rest of the criteria are the same.

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Pros And Cons Of An Unsubsidized Loan

As with subsidized loans, there are upsides and downsides to unsubsidized loans. What are they?


  • These loans create more lending options for students who aren't eligible for need-based financial assistance.
  • You can use these loans to cover the cost of your education beyond what a subsidized loan will cover.
  • There's no credit check required.
  • Interest rates are fixed, and they're generally lower than private loans.
  • Your loan may be eligible for a deferment if needed.
  • Payment options are flexible, so you can easily find a plan that aligns with your needs.
  • Since unsubsidized loans are available to graduate students, as well, there may be no need to source additional funding from other lenders.
  • You don't need collateral or a co-signer compared to private loans that may require both.


  • You're liable for any interest, so the longer you take to repay your loan, the more expensive it is.
  • Failure to pay the interest means it will accrue and capitalize, which can put a further strain on your finances.
  • Even though interest rates are still lower than that of private loans in general, they can be higher for graduate students.

So, how do these two types of student loans stack up against each other?

Subsidized vs. Unsubsidized: A Tabled Comparison

The following table shows the main differences between subsidized and unsubsidized loans for students.

Subsidized Student Loans Unsubsidized Student Loans
Who can borrow? Undergraduate students enrolled in school at least half-time. Undergraduate, graduate, and professional degree students enrolled in school at least half-time.
Who pays interest costs? The U.S. Department of Education pays while the student is enrolled in school, during specific grace periods, and when loan payments are deferred. The borrower pays during a normal repayment schedule and forbearances. The borrower.
What are loan qualifications? Must be able to demonstrate financial need. Any students can borrow. No proof of financial need is required.
What's the maximum loan limit? Undergraduate students (both dependent and independent): $23,000. Dependent undergraduate students: $31,000. Independent undergraduate students: $57,500. Graduate students: $138,500.
What are the interest rates? Fixed APR of 4.99%. Fixed APR of 4.99% for undergraduate borrowers. Fixed APR of 6.54% for graduate or professional borrowers.
Are there additional fees? The loan fee is 1.057% for loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2023. The loan fee is 1.057% for loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2023.


Choosing between a subsidized and unsubsidized student loan can be a tough decision. It's helpful to sit down and go over your finances, so you can figure out how much you can realistically afford to repay. For many people, a federal student loan is a great option. You're not required to repay the money right away, and the interest rate is relatively low. Now that you know the differences between subsidized and unsubsidized loans, you can choose the financing method that is best for you.