Subsidized vs. Unsubsidized Student Loans: Which Is Better?

Q: What’s the difference between Direct Subsidized Loans and Direct Unsubsidized Loans?

The main difference between Direct Subsidized Loans and Direct Unsubsidized Loans has to do with interest charges. On subsidized loans, the government covers interest until your grace period ends and during any other periods of deferment. On unsubsidized loans, you’re responsible for all the interest that accrues, starting from the date your loan is disbursed. Another difference is that subsidized loans are only available to undergraduate students with financial need, whereas unsubsidized loans are offered to both undergraduate and graduate students and don’t have a financial need requirement.

Q: How much can you borrow in student loans?

The amount you can borrow in student loans depends on the type of loan, your year in school, and your dependency status. As a dependent undergraduate student, you can take out up to $31,000 in federal unsubsidized and unsubsidized loans, including a maximum amount of $23,000 in subsidized loans. As a graduate or professional student, you can borrow up to $138,500 in student loans, including any loans you already borrowed as an undergraduate. If you need additional funding, you might consider a private student loan. Most private lenders let you borrow up to the cost of attendance of your school, minus any other financial aid you’ve already received.

Q: Do I pay back unsubsidized student loans?

Yes, you must pay back unsubsidized loans, including the amount you borrowed and interest charges that accrue. You can defer payments while you’re enrolled in school and for six months after you graduate. Once repayment starts, your loans will go on the standard 10-year plan with fixed monthly payments. Alternatively, you can request a different repayment plan, such as Pay As You Earn or Income-Based Repayment.

Subsidized vs. Unsubsidized Student Loans

Rebecca SafierUpdated June 14, 2022

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Editor’s Note: Since the writing of this article, the Biden administration has extended the pause on federal student loan repayment through mid 2023. As of 2022, an estimated 43.4 million borrowers have used federal student loans to pay for their education. While federal loans can be a useful tool for covering college costs, it’s important to understand the difference between subsidized and unsubsidized student loans. In a nutshell, subsidized loans are more affordable because the government covers interest charges while you’re in school. But subsidized loans are only available to undergraduates with financial need, whereas unsubsidized loans are available to any undergraduate or graduate student who qualifies for federal financial aid. Let’s take a closer look at subsidized vs. unsubsidized student loans, starting with what you need to know about subsidized loans.

What Is a Subsidized Student Loan?

A subsidized student loan is a type of federal Direct loan, also known as a Stafford loan, that the government offers to undergraduate students who have made a case for need-based financial aid.When you borrow a subsidized loan to pay for college, you don’t have to worry about interest accruing until after your grace period ends. This is because the government subsidizes, or pays for, any interest that accrues while you’re enrolled at least half-time in school or during periods of deferment. If you borrow $3,500 in subsidized loans as a freshman, you’ll still owe that same amount four years later when you graduate. You don’t have to worry about your balance ballooning due to interest charges. Note that you will be responsible for paying interest charges once your grace period (or another period of deferment) ends. What’s more, you can only borrow a certain amount in subsidized loans, which may or may not be enough to cover your cost of attendance. As an undergraduate student, you can borrow a total of $23,000 in subsidized student loans. The amount you can take out can’t exceed your financial need. Some students weigh their options on private vs. federal loans when trying to pay for their education.

Pros and Cons of Subsidized Federal Student Loans

Here are some pros and cons of subsidized student loans to consider before you borrow:

Pros of Subsidized Student Loans	Cons of Subsidized Student Loans
The government pays interest while you’re in school	Must meet financial aid requirement to qualify
The government pays interest during periods of deferment	Lower borrowing limits than unsubsidized loans

What Is an Unsubsidized Student Loan?

Unsubsidized student loans accrue interest from the date they’re disbursed. You’ll be responsible for any interest charges that accrue during periods of deferment. Unlike subsidized loans, you don’t need to demonstrate financial need to qualify for unsubsidized loans. In fact, any college or graduate student who is eligible for federal aid can take out unsubsidized loans to pay for school. What’s more, unsubsidized loans have higher borrowing limits. You can take out up to $31,000 in Direct loans as a dependent undergraduate student.

Pros and Cons of Unsubsidized Federal Student Loans

While unsubsidized loans can be more expensive than subsidized loans, they tend to be more accessible, as they don’t have a financial need requirement. Here are some pros and cons to consider:

Pros of Unsubsidized Student Loans	Cons of Unsubsidized Student Loans
No financial aid requirement	No interest subsidy
Higher borrowing limits than subsidized loans	Borrowing limit might not be enough to cover your cost of attendance

Subsidized vs. Unsubsidized Student Loans

One piece of advice often heard is to get a scholarship or grant whenever possible. But sometimes loans are essential. When comparing subsidized vs. unsubsidized student loans, you’ll see that these loan types have similarities and differences. Read on for a direct comparison of these federal student loans.

Eligible Borrowers

Subsidized student loans are only available to undergraduate students, while unsubsidized loans are available to undergraduate, graduate, and professional students. To put yourself in the running for federal student loans, you’ll need to submit the Free Application for Federal Student Aid (FAFSA). When you’re accepted to a school (or shortly after), you’ll receive a financial aid award letter that details how much you can borrow in student loans, as well as any other aid you’ve received. At this point, you can choose whether to accept the full amount, a partial amount, or no student loans. Be careful not to borrow more than you need so you don’t end up with burdensome debt after graduation. Even if you can obtain some help through employer student loan repayment, the debt can be considerable.

Interest Payment Responsibility

The main difference between subsidized and unsubsidized student loans has to do with interest payment responsibility. The government covers the interest on subsidized loans while you’re enrolled at least half-time in school and during any periods of enrollment. Interest charges will kick in when your grace period ends six months after graduation. There’s no interest subsidy on unsubsidized loans, so you’re responsible for interest that accrues from the date of loan disbursement. If you’re not making in-school payments, that interest will be capitalized, which means it will be added to your balance after your grace period ends. Interest will also accrue during periods of deferment. Note that interest accrues on both subsidized and unsubsidized loans during periods of forbearance, with the exception of the 0% interest emergency forbearance put in place the last couple of years in response to the COVID-19 pandemic.

Financial Need Requirement

The benefits of subsidized student loans are reserved for students who demonstrated financial need as determined by FAFSA. Your financial aid award letter will detail how much you can borrow in subsidized loans, if anything. Unsubsidized loans don’t have a financial need requirement. As long as you’re enrolled at an eligible school and meet the other requirements for federal aid, you can borrow unsubsidized student loans, regardless of your family’s income.

Interest rate and fees

Both subsidized and unsubsidized loans come with a fixed interest rate and an origination fee of 1.057% subtracted from your loan proceeds when you borrow. The rates are slightly higher for graduate students.When interest rates seem overwhelming, people can ask whether they can refinance federal loans.

Interest rate for undergraduate students (subsidized and unsubsidized loans): 3.73%
Interest rate for graduate students (unsubsidized loans only): 5.28%

Total Borrowing Limit

Federal student loans come with annual and aggregate borrowing limits that vary depending on several factors, including your year in school and dependency status.

	Dependent Students	Independent Students
Year 1	$5,500, with no more than $3,500 in subsidized loans	$9,500, with no more than $3,500 in subsidized loans
Year 2	$6,500, with no more than $4,500 in subsidized loans	$10,500, with no more than $4,500 in subsidized loans
Year 3 and beyond	$7,500, with no more than $5,500 in subsidized loans	$12,500, with no more than $5,500 in subsidized loans
Graduate or professional student annual limit	N/A	$20,500 (unsubsidized only)
Aggregate loan limit	$31,000, with no more than $23,000 in subsidized loans	Undergraduates: $57,500, with no more than $23,000 in subsidized loans

According to data from the Department of Education, 30.1 million borrowers owe $290.9 billion in Direct Subsidized Loans, and 30.1 million owe $562.5 billion in Direct Unsubsidized Loans. Altogether, 34.3 million owe subsidized and/or unsubsidized loans for a total of $853.4 billion. As of 2022, the average federal student loan debt balance is $37,113, according to the Education Data Initiative. It is easy to see why paying off student loans fast if at all possible becomes a priority.Here’s a closer look at the differences between subsidized and unsubsidized.

Factors	Subsidized Student loans	Unsubsidized Student Loans
Eligible Borrowers	Undergraduate students	Undergraduate, graduate, and professional students
Interest Subsidy	Yes	No
Financial Need Requirement	Yes	No
Interest Rate	3.73%	3.73% for undergraduates; 5.28% for graduate students
Origination Fee	1.06%	1.06%

The Takeaway

If you’re borrowing student loans to pay for college or graduate school, federal student loans can be a useful option. Federal student loans come with relatively low, fixed interest rates, and they’re eligible for a variety of repayment plans after you graduate. Subsidized student loans are a more affordable option than unsubsidized ones, but they also have more specific eligibility criteria. Either way, both loan types come with borrowing limits, which may or may not be enough to cover your cost of attendance. If you’ve maxed out your eligibility for federal student loans and need additional funding for school, it may make sense to borrow a private student loan. After you graduate, you might also explore refinancing your student loans. One of the benefits of refinancing student loans is getting a better interest rate, but be careful about refinancing federal loans, as doing so means you lose access to federal forgiveness programs and other programs. Lantern can help you find and compare student loan refinance rates.

3 Student Loan Tips

Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
Depending on their income, qualified borrowers can deduct the interest they pay for student loans, both federal or private, up to $2,500 per year. The deduction phases out for modified adjusted gross incomes of $70,000 to $85,000 for single individuals and $140,000 to $170,000 for people married and filing jointly.

Frequently Asked Questions

What’s the difference between Direct Subsidized Loans and Direct Unsubsidized Loans?

How much can you borrow in student loans?

Do I pay back unsubsidized student loans?

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Photo credit: iStock/hobo_018

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About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

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