Subsidized vs Unsubsidized loans

When it comes to financing higher education, many students and their families rely on loans to bridge the financial gap. Two common types of loans offered through the federal student aid program are Subsidized and Unsubsidized loans.
While both provide valuable financial support, understanding the differences between these loan types is essential for making informed borrowing decisions. In this article, we will compare Subsidized and Unsubsidized loans, exploring their key features, benefits, and how they cater to the unique needs of students seeking to fund their college education.

Subsidized Loans

What are Subsidized Loans?

Subsidized loans, also known as Direct Subsidized Loans, are a type of federal student loan available to undergraduate students with demonstrated financial need. These loans are part of the William D. Ford Federal Direct Loan Program and are administered by the U.S. Department of Education.

Key Features of Subsidized Loans:

  1. Interest Subsidy: The defining feature of Subsidized loans is that the government pays the interest on the loan while the borrower is enrolled in school at least half-time, during the six-month grace period after leaving school, and during authorized deferment periods. This interest subsidy can save borrowers money over the life of the loan.
  2. Financial Need Requirement: To qualify for a Subsidized loan, students must demonstrate financial need, which is determined by the information provided in the Free Application for Federal Student Aid (FAFSA).
  3. Loan Limits: There are limits to how much a student can borrow in Subsidized loans, based on their academic year and dependency status.
  4. Undergraduate Students Only: Subsidized loans are available exclusively to undergraduate students pursuing their first bachelor’s degree.

Unsubsidized Loans

What are Unsubsidized Loans?

Unsubsidized loans, also known as Direct Unsubsidized Loans, are another type of federal student loan available to both undergraduate and graduate students. Unlike Subsidized loans, eligibility for Unsubsidized loans is not based on financial need.

Key Features of Unsubsidized Loans:

  1. Interest Accrual: With Unsubsidized loans, the borrower is responsible for paying all the interest that accrues on the loan. Interest begins to accrue from the moment the loan is disbursed, even while the student is in school.
  2. No Financial Need Requirement: Unsubsidized loans are available to all eligible students, regardless of their financial need or income.
  3. Higher Loan Limits: Unsubsidized loans generally have higher borrowing limits compared to Subsidized loans, which can be beneficial for graduate students or undergraduate students who have reached their Subsidized loan limits.
  4. Undergraduate and Graduate Students: Unsubsidized loans are available to both undergraduate and graduate students, making them a versatile option for students pursuing advanced degrees.

Choosing Between Subsidized and Unsubsidized Loans

When deciding between Subsidized and Unsubsidized loans, students should consider their financial need, borrowing limits, and the interest implications. Here are some factors to consider:

  1. Financial Need: If a student demonstrates financial need, Subsidized loans may be a preferred choice due to the interest subsidy, which helps reduce the overall loan burden.
  2. Interest Responsibility: Students who do not demonstrate financial need or have reached their Subsidized loan limits may opt for Unsubsidized loans. While interest accrues from the start, borrowers can choose to make interest payments while in school or during deferment to prevent it from capitalizing.
  3. Loan Limits: Students should be aware of the annual and aggregate loan limits for both Subsidized and Unsubsidized loans, as exceeding these limits can impact their ability to borrow in the future.

What kinds of student loans are there?

Federal student loans are made by the government; you need to file a FAFSA® to be eligible for them. Federal loans have a standard interest rate, set by the government, and can offer more flexibility than private loans with different repayment options. Federal direct loans are sometimes referred to as “Stafford” loans—they’re the same thing.

Types of federal student loans:

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Direct PLUS Loans, which include Grad PLUS Loans for graduate and professional students, and Parent PLUS Loans, which are lent to a student’s parents. PLUS Loans are the only federal loans that are credit-based.

Private student loans are made by banks and other financial institutions. They’re credit-based, so you and/or your cosigner need to have good credit. You apply directly from the loan issuer to request a loan. Private loans often offer fixed or variable interest rates (which can differ from one issuer to another).

What’s the difference between a federal subsidized and unsubsidized student loan?

Both loans have the same interest rates, and interest accrues (grows) on both from the moment your school gets the money. The difference is who pays the interest that accrues (grows) while you’re in school—you or the government.

Subsidized loans: Federal subsidized loans are based on financial need (as determined by the FAFSA®). In effect, the government is paying the interest for you while you’re in school (if you’re enrolled at least half-time), during your grace period, and if you need a loan deferment. When you leave school, the government stops paying your loans’ interest. Your repayment amount includes the original amount of the loan and the interest that starts to accrue (grow) from that moment. Subsidized loans are only available to undergraduates, and there’s usually a lower loan limit than with an unsubsidized one.

Unsubsidized loans: With an unsubsidized loan, you are responsible for the interest from the moment the loan money is disbursed (sent) to your school. Unlike a subsidized loan, the federal government will not help with any of it. Unsubsidized loans are available to both undergrads and graduate students. When you start paying back your unsubsidized loans, your repayment amount will include the amount borrowed and the interest that has accrued.

So why would anyone ever take out an unsubsidized loan?

Both types of federal loans are only available when you apply for aid through the Free Application for Federal Student Aid (FAFSA®).

If you qualify for a subsidized loan, you should generally take that financial aid, since it’ll save you money. If you don’t qualify, however, there are two plusses to getting an unsubsidized loan:

–   You don’t have to demonstrate need for an unsubsidized student loan, so you can usually borrow more money.
–   You can use the funds to pay for a graduate degree.

Generally, you’ll find out which types of loans you’re eligible for when you receive your school’s financial aid offer.

The FAFSA® is key

If you need to take out a loan to pay for college, know that you’re not alone. College is expensive and no one expects you to have planned for all contingencies. Just be sure to file the FAFSA®—it’s the key to all federal financial aid, including college scholarships, college grants, and your eligibility for subsidized and unsubsidized student loans.


Subsidized and Unsubsidized loans are valuable tools that provide essential financial support to students pursuing higher education. Understanding the differences between these loan types can help students make informed decisions about their borrowing needs. By carefully considering their financial situation, academic goals, and interest implications, students can choose the loan type that best aligns with their educational aspirations and sets them on the path to academic success.


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