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Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

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In a Nutshell

There are two broad categories of federal student loans: subsidized and unsubsidized. Subsidized student loans are granted based on financial need. The main advantage of subsidized loans is that they don’t accrue interest while you’re in school or if you get approved for deferment after entering repayment. These loans are called subsidized because the federal government pays some of the interest on the loans. Unsubsidized loans aren’t based on financial need and do accrue interest while you’re in school or in a period of deferment or forbearance after you enter repayment. Because interest is treated differently on unsubsidized loans, they often end up costing more over the long run than subsidized loans. This is why many student loan experts recommend maxing out any subsidized loans you’re offered before getting unsubsidized loans.

Written by Jonathan Petts
Updated August 24, 2023


If you’re struggling to figure out all the various facets of financial aid, loans, grants, and work-study programs, you’re not alone. This can feel as tricky for first-time borrowers as for grad students. The truth is that this can be complicated! But we’re here to help. 

First, if you’re an undergraduate, chances are good that you’ll be offered loans from the Federal Direct Loan Program. This is the most popular loan program right now. These are called Direct Loans because the U.S. Department of Education issues them directly to borrowers. In other words, there’s no middleman. There are two basic types of Direct Loans: subsidized and unsubsidized.  

Subsidized vs. Unsubsidized Student Loans: The 2 Biggest Differences

It might feel like all student loan debt is more or less the same, but understanding the nuances of different types of loans could save you thousands of dollars over time.

There are two major differences between subsidized and unsubsidized federal student loans: who is eligible and how interest is treated.

Eligibility Requirements for Subsidized vs. Unsubsidized Loans

Many of the eligibility requirements are the same for subsidized and unsubsidized loans. But to be eligible for a subsidized student loan, you must be an undergraduate student with financial need. Unsubsidized loans, by contrast, are available for undergraduate and graduate students and do not depend on the borrower’s financial need.

There are other eligibility requirements. For both loans, the borrower must:

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

  • Be enrolled in school at least half time

  • Not have defaulted on a previous student loan nor owe a refund to any previous aid program

  • Maintain satisfactory academic status while in school

With both types of loans, before you receive your initial loan funds, you must complete entrance counseling and sign a Master Promissory Note. Finally, you must submit a FAFSA (Free Application for Federal Student Aid) each year to receive federal Direct Loans, whether subsidized or unsubsidized. 

Student Loan Interest Rates & Fees: Subsidized vs. Unsubsidized Loans

Subsidized and unsubsidized loans both have the same fixed interest rate. Congress sets this interest rate for the upcoming academic year annually each May. This interest rate is fixed for the life of the loan. 

You can find the rates for the current academic year at StudentAid.gov. You can find the interest rate information on any past federal loans you’ve taken out by looking at your loan information on your StudentAid.gov account or by using the NSLDS. Here’s how to use the NSLDS to find your federal loan information.

With both types of loans, you must also pay an origination fee. You don’t pay this fee directly though. The federal government subtracts the fee from the loan amount before giving you the funds. 

The Government Pays Interest on Subsidized Loans While You’re In School 

While the interest rate is the same for subsidized and unsubsidized loans, there are a few crucial differences in how interest works. 

  • Subsidized loans accrue interest while you’re enrolled in school, but the federal government pays the interest on your loans so long as you’re enrolled at least half time.

  • Before you enter repayment, you get a six-month grace period where the government will also pick up the tab on interest accruing on subsidized loans.

  • If you are approved for a deferment (temporary payment pause due to financial hardship or other approved reasons), interest will continue to accrue during that time, but the federal government will pay it. This saves you some money in the long run.

Borrowers Are Responsible for Accrued Interest on Unsubsidized Loans

By contrast, interest accrues on unsubsidized loans while students are still in school and once they enter repayment, and it is solely the borrower’s responsibility to pay it. Interest also continues to accrue and is the borrower’s responsibility to pay if the borrower’s loans are in deferment or forbearance.

Essentially, as the borrower, you’re responsible for paying any accrued interest. If you decide not to pay the interest on an unsubsidized loan while in school, interest will accrue and be capitalized. This means it gets added to the original loan amount. 

Unsubsidized loans also have a six-month grace period. This means no loan payments are due until six months after you graduate, drop below half-time enrollment, or leave school altogether. But unlike with subsidized loans, interest will continue to accrue and be capitalized during the unsubsidized loan’s grace period. 

Federal Subsidized Loans: What You Need To Know

In short, federal direct subsidized loans have slightly better terms than federal direct unsubsidized loans. Subsidized loans have rules about:

  • The number of years you’re eligible to take out loans

  • The annual amount you can borrow

  • The total lifetime amount of loans you can get

You’re eligible to receive subsidized loans for up to 150% of the published length of your academic program. For example, if you’re enrolled in a four-year program, your loan eligibility period is six years. If you’re enrolled in a two-year program, your loan eligibility period is three years.

The school you’re enrolled in will determine how much you can borrow each year. The loan amount can’t exceed your financial need. The annual borrowing limit of a subsidized loan varies, but they typically have lower loan limits than unsubsidized loans. 

For example, the annual loan limit is $5,500 for first-year dependent undergraduate students, and up to $3,500 can be subsidized loans.

The aggregate subsidized loan limit for a dependent student's entire undergraduate education is $31,000, and up to $23,000 of this can be subsidized loans.

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Federal Unsubsidized Loans: What You Need To Know

Unsubsidized student loans are available to undergraduate and graduate students regardless of financial need. Your school determines how much you can borrow based on your cost of attendance and other financial aid that you receive. There is no time limit on taking out unsubsidized loans. You’re responsible for paying the interest on an unsubsidized loan during all periods.

Annual loan limits vary, but unsubsidized loans typically have higher loan limits than subsidized loans. The aggregate unsubsidized loan limit for the entire time a student is enrolled in school — also called the maximum eligibility period — is: 

  • $31,000 for dependent undergraduate students

  • $57,500 for independent undergraduate students

  • $138,500 for graduate or professional students (who are automatically considered independent)

The Department of Education considers you a dependent student if you depend on a parent or guardian for financial support like food and housing. If you’re a dependent student, you must report your parents’ or guardians’ income on your FAFSA. Independent students typically receive significantly more financial aid than dependent students.

Federal Student Loan Repayment Options for Subsidized and Unsubsidized Loans

When it comes to repaying your federal student loans, things are pretty much the same whether your loan is subsidized or unsubsidized. The only difference is how interest is treated on the loan during the grace period and periods of deferment. (See above to learn more.)

Aside from that, you will be automatically assigned to the Standard Repayment Plan (SRP) unless you choose a different plan. You can choose a different plan right away or at any time during your repayment period. 

One advantage of federal student loans is that you have a lot of flexibility when it comes to repayment! You can change repayment plans at any time at no cost. Contact your loan servicer if you want to discuss repayment plan options or change your repayment plan

Of course, flexibility and choice can sometimes make it feel harder to decide what to do. That’s why we wrote this article: What’s the Best Student Loan Repayment Plan for Me? Check it out to better understand how to choose the right plan for you based on your financial goals.

Standard Repayment Plan Basics

The Standard Repayment Plan works a lot like personal loan repayment. That means your monthly payment is calculated by dividing your total loan amount by 10 years of repayment. Ten years is the shortest repayment period of all federal repayment plans. 

The upside of the SRP is that you’ll get your loan paid off pretty quickly and without accumulating a lot of extra interest. The downside is that the monthly payment can be unaffordable for many borrowers. If that’s the case, consider switching to an income-driven repayment plan.

Income-Driven Repayment Plan Basics

An income-driven repayment plan refers to any federal student loan repayment program that ties your monthly loan payment to your income and family size. The loan servicer will also look at the type(s) of loans you have and where you live.

Currently, the federal government offers four different types of IDR plans:

  • Income-Based Repayment (IBR)

  • Income-Contingent Repayment (ICR)

  • Pay As You Earn (PAYE)

  • Saving on a Valuable Education (SAVE) Plan

IDR plans usually result in lower monthly loan payments compared to the Standard Repayment Plan. Depending on your income, your payment could be significantly lower, even as low as $0 per month. You’ll also be eligible for student loan forgiveness on any remaining balance after the repayment period ends. This is usually after 20–25 years.

Both direct subsidized and unsubsidized loans are eligible for any of the four IDR plans.

What About Private Student Loans?

Up until now, we’ve just been focusing on federal student loans. Federal student loans have advantages like fixed interest rates and income-driven repayment plans that many private student loans don’t offer. 

Private loans are made by private institutions like banks, credit unions, or other financial institutions The private lender, rather than federal law, sets the terms and conditions for private student loans. 

Private student loans are generally more expensive than federal student loans. They usually have higher interest rates (which may be variable) and require that the borrower has a good credit score (or gets a cosigner on the loan who does).

This is why most student loan experts recommend maxing out any federal student aid or student loans before you take on private student loans.

This is also recommended because private student loans tend to have less flexible repayment terms. Also, many private student loans require borrowers to make payments while they’re still in school.

Let's Summarize...

The federal government offers two types of Direct Loans: subsidized and unsubsidized. Eligibility for subsidized loans is based on financial need. Borrowers aren’t required to show any financial need to qualify for an unsubsidized loan.

Student borrowers must repay both subsidized and unsubsidized loans with interest, though the federal government covers some of the interest payments on subsidized loans. Subsidized loans are usually cheaper than unsubsidized loans when you factor in interest payments over time.



Written By:

Jonathan Petts

LinkedIn

Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and CEO of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in bankrupt... read more about Jonathan Petts

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