Subsidized vs. Unsubsidized Student Loans: A Comprehensive Guide

The Education Department offers two types of federal student loans: subsidized and unsubsidized. Of the two, subsidized loans are the better option. They come with benefits that reduce the interest you’ll pay over time, ultimately saving you money.

But not everyone qualifies for these loans, and they often come with lower borrowing limits.

So if your educational expenses are high, you might need to supplement with unsubsidized loans.

A subsidized student loan is a special kind of federal loan for undergrad students who need financial help. The U.S. Department of Education pays the loan interest in those cases:

• While you’re in school at least half the time

• If you pause your payments for a while (this is called ‘deferment’)

• For six months after you leave school or go below half-time

This means you won’t see your loan amount grow during these times.

An unsubsidized student loan is a federal loan open to both undergrad and grad students, no matter their money situation. These loans differ from subsidized ones because they’re not based on financial need. How much you can get is figured out by:

• The total cost of going to your school

• Minus any other money help you get (like grants or scholarships)

Related: Can Unsubsidized Loans Be Forgiven?

To get either a subsidized or unsubsidized loan, you need to fill out a form called FAFSA on the StudentAid.gov website. After you do this, you’ll get a report that tells you how much aid you can get.

For Subsidized Loans, you need to:

• Be a U.S. citizen or allowed to live in the U.S.

• Have a Social Security number that’s valid

• Go to school at least half the time in a program that’s allowed

• Keep your grades up

Your school’s financial help office will look at your FAFSA and other things, like how much school costs and what your family can pay, to decide whether you can get a subsidized loan and how much you can get.

For Unsubsidized Loans, you need to:

• Fill out a FAFSA

• Be a U.S. citizen, or a national or permanent resident

• Go to school at least half the time

• Not owe any money back from other aid programs

• Keep your grades up

This chart shows the annual and aggregate limits for subsidized and unsubsidized loans.

Notes:

• *Grad students can only get unsubsidized loans and are considered independent students.

• **The limits include any loans you may have gotten for undergrad studies.

• The numbers in the table are the most you can get. You might get less based on your school’s costs and other aid you receive.

• If you’re a dependent student and your parents can’t get a Parent PLUS Loan, you might be able to get more in unsubsidized loans (this isn’t shown in the table).

• All these loans have a small extra charge called an ‘origination fee.’ It’s 1.057% of the loan and is added after Oct. 1, 2020.

Interest accrual on subsidized and unsubsidized loans works differently.

Subsidized Loans

Subsidized loans are offered to undergraduate students who show financial need. These loans do not:

• Accumulate interest while the student is in school or during deferment.

• Accrue interest during the six-month grace period after you graduate or drop below half-time enrollment.

Technically, interest accrues during these periods, but it’s paid by the federal government. This means that you’re not responsible for the interest that accrues during these periods.

While subsidized loans are need-based and have interest benefits, they aren’t the same as Pell Grants. The main difference is that subsidized loans must be repaid, while Pell Grants are free money you need not repay.

Unsubsidized Loans

Undergrad and grad students can get unsubsidized loans. And you don’t need to show you’re in financial need to get one. But unlike subsidized loans, these loans charge interest all the time —even when you’re in school, in deferement, or in a grace period.

You have to pay all this interest.

If you don’t pay the interest while you’re in school or taking a break, it adds up and gets added to the amount you borrowed. This capitalization will increase the amount you have to pay over the life of the loan.

Related: When Does Student Loan Interest Capitalize?

Interest Calculation

Interest on student loans is charged daily. To calculate the interest accrued, lenders use the following formula:

Interest=Loan Balance×(Number of Days in Year/Annual Interest Rate​)×Days in Accrual Period

For example, if the balance on a student loan is $10,000 and the annual student loan interest rate is 5%, the simple interest due after one year is $500 ($10,000 x 0.05).

If the interest isn’t paid as it accrues, it can be capitalized or added to the loan balance.

For example, if the loan balance starts at $10,000 and the interest due after one year is capitalized, the new loan balance becomes $10,500 ($10,000 + $500), and the interest accrued in year two is $525 ($10,500 x 0.05).

Grace Periods

Subsidized and unsubsidized loans have a six-month grace period before payments are due. The grace period for each starts after you graduate, leave school, or drop below half-time enrollment.

During this period, no loan payments are required.

The federal government continues to pay the interest for subsidized loans during that time.

For unsubsidized loans, interest continues to accrue during this period, and if not paid, it will be capitalized.

The interest rate for subsidized student loans disbursed on or after July 1, 2022, through June 30, 2023. is a fixed annual percentage rate of 4.99%.

The interest rate on unsubsidized student loans disbursed during that same period is:

• 5.50% for undergraduate loans

• 7.05% for graduate or professional degree loans

• 8.05% for Grad and Parent PLUS Loans.

Subsidized loans are slightly better than Direct Unsubsidized Loans because the federal government pays the interest on these loans while you’re in school at least half-time, during deferment periods, and for the first six months after you leave school (grace period).

This means that the loan doesn’t accrue interest during these periods, which can significantly reduce the overall cost of the loan.

Unfortunately, Direct Subsidized Loans are need-based and only available to undergraduate students. Subsidized loans are unavailable to graduate students.

Unsubsidized loans are available to both undergraduate and graduate students. Plus, you need not show a financial need. And the annual loan limits are higher than subsidized loans, making a massive difference if you need to borrow more money.

The broader eligibility comes at a cost: Interest on these loans begins accruing once the loan is disbursed. That means interest will start accruing while you’re in school and during grace and deferment periods. As a result, the overall cost of the loan can be higher than a subsidized loan.

Consider paying the interest on your unsubsidized loans while you’re still in school. This is because the interest starts adding up right away. Even if you don’t have to make payments yet, paying something toward the interest can keep your loan amount from getting too big later on.

You can also make payments on your subsidized loans in school. This will make the amount you owe smaller, but it won’t help you if you’re aiming for loan forgiveness later. Those payments won’t count as qualifying payments for the different forgiveness programs.

Of the two, I recommend paying your unsubsidized loans first. The government is covering the interest on your subsidized loans. So it’s smarter to pay off the unsubsidized ones first. This is even more important if these are loans you took out for grad school, as they have higher interest rates.

Related: Are Stafford Loans Eligible for PSLF?

Subsidized loans are usually the better choice because they can save you money over the years. But not everyone can get them, and they have limits on how much you can borrow. So you might also need unsubsidized loans to pay for school.

Federal loans should be your first pick, but private loans can help if you still need more money. Just be careful. Private student loans don’t have the same helpful options like payment plans based on your income or loan forgiveness.