Subsidized vs Unsubsidized Student Loans: Which Is Better?

Rebecca SafierUpdated August 23, 2023

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An estimated 43 million borrowers have federal student debt. 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 undergrad 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.Recommended: What Is a Master Promissory Note in Student Loans?

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.Recommended: Understanding Capitalized Interest on Student Loans

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. When interest rates seem overwhelming, people can ask whether they can refinance federal loans.Federal student loans disbursed from July 2023 through June 2024 have the following rates:

Interest rate for undergraduate students (subsidized and unsubsidized loans): 5.50%
Interest rate for graduate students (unsubsidized loans only): 7.05%
Interest rate for Direct PLUS Loans (parents and graduates): 8.05%

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

The average federal student loan debt balance is more than $37,000, 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	• 5.50%	• 5.50% for undergraduates; 7.05% for graduate students
Origination Fee	• 1.057%	• 1.057%

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. (Refinancing for a longer term may increase your total interest costs.)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.)
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 $145,000 to $175,000 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?

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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