What is the difference between subsidized and unsubsidized student loans?

If you need to borrow money to help pay for the cost of higher education at a college, trade, career, or technical school, Direct Subsidized loans and Direct Unsubsidized student loans are two of your best options.

Both are low-interest loans issued by the federal government and come with many federal benefits. With either type of federal student loan, you can fully defer payment until six months after you leave school and you can join an Income-Driven Repayment (IDR) plan or pursue various federal forgiveness programs .

But beyond these similarities, there are a few terms, conditions, and benefits that make them different.

What is the difference between subsidized and unsubsidized loans?

Choosing subsidized loans to pay for school can save you a lot of money in interest charges. But they can be harder to qualify for than unsubsidized loans and there are stricter limits on how much you can borrow and when.

Interest payment responsibility

The main difference between subsidized and unsubsidized loans comes down to who pays the interest that accrues while you're in school and during your grace period.

Direct Subsidized loans : The Department of Education will pay the interest on your loans while you're enrolled in school at least half-time, during your grace period, and during any period of deferment.
Direct Unsubsidized loans : You are responsible for the interest that accrues during all periods.

Keep in mind that neither type of loan will require you to make payments while you're in school. But with subsidized loans, the amount you borrowed will match your outstanding balance when repayment begins. With unsubsidized loans, on the other hand, your balance will also include the interest that accrued during your academic deferment.

Unsubsidized student loan borrowers can choose to make interest-only payments while they're still in school. But if you elect to not make any payments, your unpaid interest will be added to your principal balance when your regular repayment schedule begins.

Borrower requirements

The fact that the government pays the interest that accrues during deferment for unsubsidized loans makes them an incredibly attractive option. But they also have tougher borrower qualification standards:

Direct Subsidized loans

Only available to students who are able to demonstrate financial need. The amount of money received cannot exceed the financial need.
Only undergraduate students can take out subsidized loans

Direct Unsubsidized loans

No requirement to demonstrate financial need
Available to both undergraduate and graduate students

If your school's financial aid department determines that you don't have a financial need, you won't be able to take out any subsidized loans. And if you're a graduate or professional student, you won't qualify for a subsidized loan, regardless of your financial situation.

Loan limits

Even if you do qualify for some subsidized loans, there's a strong chance that you won't be able to pay for your entire education with them.

The annual and lifetime borrowing limits on subsidized loans are more rigid than unsubsidized loans. Here's how much you can borrow per year and overall with both types of loans.

Year Dependent Students Independent Students First-Year Undergraduate Subsidized : $3,500 Unsubsidized : $5,500 Subsidized : $3,500 Unsubsidized : $9,500 Second-Year Undergraduate Subsidized : $4,500 Unsubsidized : $6,500 Subsidized : $4,500 Unsubsidized: $10,500 Third-Year and Beyond Undergraduate Subsidized : $5,500 Unsubsidized : $7,500 Subsidized : $5,500 Unsubsidized : $12,500 Graduate or Professional Student N/A Unsubsidized : $20,500 Aggregate Loan Limit Subsidized : $23,00 Unsubsidized : $31,000 Subsidized: Undergraduate: $23,000 Graduate or Professional Students: $65,000 Unsubsidized Undergraduates: $57,500 Graduate or Professional Students: $138,500

Time limits

For subsidized loans taken out after July 1, 2013, there is a limit to how many academic periods you can receive funds. Your maximum eligibility period will be 150% of the published length of your program.

So, for example, if you're enrolled in a four-year bachelor's degree program, your maximum eligibility period for subsidized loans will be six years (4 x 1.5 = 6) For a two-year program, you could only receive subsidized loans for three years (2 x 1.5 = 3).

Unsubsidized loans do not have any maximum eligibility periods. You can continue to qualify for them as long you're enrolled at least part-time in a qualifying higher-education program.

Interest rates and fees

For undergraduate students, subsidized and unsubsidized loans charge the same interest rate. Unsubsidized loans that are taken out by graduate or professional students, however, come with higher rates.

The Department of Education just released the new interest rates for Direct Stafford loans that will be taken out after July 1, 2020 and before July 1, 2021. And borrowers will be happy to hear that the new rates are record lows.

Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students : 2.75%

Direct Unsubsidized Loans for Graduate and Professional Students : 4.30%

However, it should be pointed out that your rate will be different if your loans have already been taken out. For example, Direct Stafford Loans that were taken out by undergraduate students after July 1, 2019 and before July 1, 2020 came with an interest rate of 4.53% and the rate for graduate students was 6.08%.

You can check the interest rates on your federal student loans by logging into StudentAid.gov or by contacting your loan servicer.

Also, due to the financial difficulties that so many borrowers are facing in the wake of the COVID-10 crisis, the Department of Education has paused all federal student loan payments and interest accrual on federal loans that it owns until September 30, 2020.

Application process

To apply for either type of Direct loan, you'll need to first submit your Free Application For Federal Student Aid (FAFSA) .

Your school will analyze the information inside your FAFSA to decide how much federal aid you qualify for and if any of that aid can be in the form of subsidized loans.

The bottom line

If you qualify for subsidized loans, the in-school interest subsidy they offer will make them your best option . However, if you've already hit your subsidized loan limits or your financial situation disqualifies you for them, unsubsidized loans still come with lower interest rates and more benefits than you'll typically find with private student loans .

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