Subsidized vs Unsubsidized Loans

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Understanding the difference between subsidized vs. unsubsidized student loans could help you save a bundle in student loan debt.

But considering how much they have in common, it’s understandable if you have trouble telling them apart (especially since they also go by other names — we’ll explain in a bit).

Both loans are part of the federal government’s financial aid offerings, designed to help students cover the cost of college. To qualify for the federal direct loan program, you must be enrolled at least half-time in school in a program that leads to a degree or a certificate.

Although unsubsidized claims a larger portion of outstanding direct loans — $563.5 billion compared to $291.5 billion in subsidized loans as of the fourth quarter of 2021 — there’s plenty of overlap among borrowers who take out both types.

We’ll explain the difference between the two loans and how each can affect your finances long after you finish your final exams.

Subsidized vs. Unsubsidized Student Loans

A side-by-side comparison of subsidized and unsubsidized loans is probably the easiest way to see the differences — we’ll get into the details after.

Loan Type Comparison

Requirements Direct Subsidized Loans Direct Unsubsidized Loans
Who can borrow? Undergraduate students Undergrad, grad and professional degree students
Am I required to prove financial need? Yes No
How much can I borrow? Limited by financial need, year in school & total. Limited by cost to attend, year in school & total.
Is there a time limit? No limit after July 1, 2021. No time limit.
Who pays the interest while I’m in school and during deferment? The government You

Based on this chart, the winner is direct subsidized loans. (If you don’t understand why, check that last row: Any option that includes someone else paying your bills is a winner).

But let’s take a closer look at each.

Who Qualifies for a Direct Student Loan?

You’ll need to be an undergraduate student who can prove financial need to qualify for direct subsidized loans. Your college’s financial aid office determines your eligibility. Direct unsubsidized loans do not require you to meet a financial need threshold. They are available to undergraduate, graduate and professional-level students.

Here are the details about proving financial need.

Qualifying for Subsidized Loans

The only way to get direct subsidized loans is if your college’s financial aid office determines you can’t afford to pay the cost of attending the school.

Although the formulas can get a little complicated — and vary by school — here’s a basic way for finding out how much you can get in subsidized vs. unsubsidized loans:

  • Cost of attendance (COA) – expected family contribution (EFC) = need-based aid (including scholarships, grants, work-study programs and subsidized loans).
  • Cost of attendance – financial aid you’ve already been awarded (including need-based aid and merit-based scholarships) = direct unsubsidized loan.

The financial aid office at your college decides how much financial aid you are eligible to receive, so if you think there’s an error or you would like to appeal, you should contact them.

What Are the Annual Loan Limits for Direct Federal Loans?

Undergraduate students can borrow between $3,500 and $5,000 in subsidized loans each school year, depending on the college, the year in school and the total amount borrowed — aka the aggregate loan limit. Unsubsidized loans have higher limits.

We’ll break down the limits by loan type provided by the Department of Education.

Subsidized Loan Limits for Undergraduates

The maximum subsidized loan limits are as follows, regardless of whether you’re considered a dependent or independent student:

  • First year: $3,500
  • Second year: $4,500
  • Third year and beyond: $5,500
  • Aggregate (total) subsidized loan limit: $23,000

Graduate students and professional degree students are not eligible for direct subsidized loans.

Unsubsidized Loan Limits for Undergraduate Students

Direct unsubsidized loans for undergraduate students are limited by your dependency status and by the amount of subsidized loans you’ve borrowed.

If you’ve received the maximum amount in subsidized loans, you’ll need to subtract that amount from the total unsubsidized limit. For example, if you’re a first-year dependent student who’s received the maximum subsidized amount of $3,500, you can also borrow up to $2,000 in unsubsidized loans ($5,500 – $3,500).

Unsubsidized Loan Limits for Undergrads: Dependent vs. Independent Students

Year in School Dependent Students Independent Students
First $5,500 $9,500
Second $6,500 $10,500
Third and beyond $7,500 $12,500
Aggregate (total) loan limit $31,000 $57,500

Note: If you are an undergraduate student whose parents are unable to obtain PLUS Loans, you qualify for the independent student loan limits.

Unsubsidized Loan Limits for Graduate and Professional Students

Graduate and professional students are eligible for direct unsubsidized loans, with an annual limit of $20,500 and an aggregate loan limit of $138,500.

However, if you still owe money on federal loans you took out as an undergraduate student, that amount is included in the total. No more than $65,500 of the aggregate loan limit may be in subsidized loans that you received as an undergrad.

Is There a Time Limit for Direct Federal Loans?

If you’re applying for the current or upcoming school year, there are no time limits for direct federal subsidized or unsubsidized loans. If you were a first year student between July 2013 and July 2021, you are restricted in subsidized loans by the length of your program.

Here’s the breakdown for both.

Subsidized Loans

As of July 1, 2021, there is no time limit for eligibility to apply for direct subsidized loans.

However, if you became a first-time borrower after July 1, 2013, and and before July 1, 2021, there is a time limit. That limit is 150% of the published length of the program you were enrolled in — so if you were in a four-year program, you have six years worth of eligibility, so long as you’ve been enrolled at least half-time.

Pro Tip

If you lose eligibility for subsidized student loans but stay enrolled in your current program, you’ll become responsible for paying the interest on any subsidized loans you previously took out.

Unsubsidized Loans

There is no eligibility time limit for unsubsidized federal loans.

Two students do college work together at a table.
Getty Images

How Does Interest Accrue on Federal Student Loans?

The U.S. Department of Education suspended all interest and payments for eligible federal subsidized and unsubsidized student loans through Aug. 31, 2022, due to the pandemic.

Subsidized loans

If you have a subsidized loan, the federal government pays the interest on loans when you’re in school at least half-time, during the six-month grace period after you leave school and during deferments.

Unsubsidized loans

If you have an unsubsidized loan, interest accrues each year of college and during your grace period. After the grace period ends the interest capitalizes.

Confused? Let’s look at an (admittedly simplified) example:

Sara and John each apply for federal student loans to cover expenses during their junior and senior years of college.

Both years, they each receive $5,000 loans with a 3% interest rate.

Sara qualifies for a subsidized loan while John gets an unsubsidized loan. Let’s see where each ends up.

Subsidized vs. Unsubsidized Interest Comparison

Loan details Sara (Subsidized) John (Unsubsidized)
Total amount borrowed $10,000 $10,000
Interest accrued in college $0 $450
Interest accrued during grace period $0 $150
Total owed six months after leaving school $10,000 $10,600

What Are the Interest Rates for Direct Federal Loans?

For direct subsidized and unsubsidized loans disbursed between July 1, 2021, and July 1, 2022, the undergraduate interest rate is 3.73%. For graduate students, the unsubsidized loan interest rate is 5.28%. Those rates are currently suspended during administrative forbearance, which end Aug. 31, 2022.

Each year, the federal government sets the interest rates for all student loans.

Do Federal Loans Charge Fees?

For subsidized or unsubsidized loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2022, the loan fee is 1.057%. On a $3,000 loan, the fee would be $31.71, so you’d receive $2,968.29.

The fee changes from year to year and is calculated as a percentage based on when you took out your loan.

How Will I Receive My Subsidized or Unsubsidized Loan?

Whether it’s subsidized or unsubsidized, your student loan money is sent directly to the school to cover your tuition, fees and room and board every semester, trimester or quarter.

If there is any money left over (or if you’re living off campus), the school will send you a check for the remaining amount within 14 days. For textbooks and other learning materials, the school must provide a way for you to access the funds within seven days of the start of the term.

If you can find your textbooks and class materials for less than the campus bookstore sells them, you can request a check for the remaining amount.

Your school is required to publish the International Standard Book Number (ISBN) for all required texts in the online course schedule. Use this number if you decide to shop for better prices.

If this is the first time you’ve received a direct subsidized or unsubsidized student loan, you should be aware of the following additional restrictions:

  • If you’re a first-year undergraduate student and a first-time borrower, the school may wait up to 30 days to give you your loan money. If you need the money before then (for books, for instance), the school should have a policy in place to either provide a bookstore voucher or another way to cover the cost until you receive your loan money.
  • The federal government requires you to complete a 30-minute online entrance counseling session before you can accept a loan. Your school may require additional or alternate counseling, so check with the financial aid office first.

What’s the Difference Between Stafford and Direct Subsidized Loans?

Congress renamed the federal direct loan program in 1988 to honor U.S. Senator Robert Stafford for his work on higher education; now direct loans also go by the names Stafford loans or direct Stafford loans.

Consider this your cheat sheet:

  • Direct subsidized loans = subsidized Stafford loans = direct subsidized Stafford loans.
  • Direct unsubsidized loans = unsubsidized Stafford loans = direct unsubsidized Stafford loans.

The federal student loans for undergraduate students are called direct subsidized and direct unsubsidized loans, which are different from Parent or Graduate Plus loans, consolidated loans and the now-defunct Perkins loans.

Another name you might hear: Federal Family Education Loans (FFEL). This program ended in 2010 — all subsidized and unsubsidized student loans are now made under the direct loan program.

FAQ: Subsidized vs. Unsubsidized Federal Student Loans

How do I apply for direct federal loans?

Whether you’re applying for a direct subsidized or unsubsidized loan, you need to first submit the Free Application for Federal Student Aid. The colleges that you apply to will use your FAFSA form to decide your financial aid eligibility.

Here’s our step-by-step guide to filling out the FAFSA.

Should I take out federal or private student loans?

When possible, stick with direct federal loans, which are eligible for income-based repayment and forgiveness programs, unlike private loans. Private student loans also aren’t eligible for the federal government’s pause in payments and interest currently in effect. 

How can I tell the difference between my subsidized and unsubsidized loans?

If your loan is for the current or upcoming academic year, contact your school’s financial aid office directly to ask about the loan details. If it’s an older loan, you can contact your loan servicer or use your FAFSA login and password to sign onto studentloans.gov

 

Each entry on the government site will indicate the company hired by the federal government to service the loan — look for names like Nelnet, Great Lakes or FedLoan, three commonly used loan servicers. Any further interaction in regards to your loan should go through your loan servicer.

Are unsubsidized loans bad?

No, they aren’t bad. But unsubsidized loans do accrue interest while you’re in school. Subsidized loans, on the other hand, don’t accrue interest while you’re in school or during grace periods, but to get a subsidized loan you have to prove financial need. Unsubsidized loans have no financial need requirement and their limits are higher than subsidized loans. 

So if you don’t get enough subsidized loans to cover college costs, you can get additional money from unsubsidized loans.

Do you have to pay back subsidized and unsubsidized loans?

Yes. The government has put a pause on payments and interest for all qualified student loans through Aug. 31, 2022, but you shouldn’t expect that forbearance period to last forever. When it does end, lenders will resume collecting payments and charging interest.

When you initially receive direct loans, you’ll hear from your loan servicer, who will be your contact if you have questions about your payments or the loan. 

If you’re in college and hold both subsidized and unsubsidized loans, try to start paying back unsubsidized loan interest first to avoid as much interest capitalization as possible when you graduate.

Can my loans ever be forgiven or discharged?

Student loan forgiveness typically takes years to qualify for — sometimes as much as 25 years. Many forgiveness options depend on your job being in sectors like public service. Otherwise, loan discharge is typically limited to income-driven options or extreme circumstances, like permanent disability or a school closing.

What if I change my mind?

If you realize that you don’t need your subsidized or unsubsidized loans after all, you may cancel all or part of your loan within 120 days of receiving it without accruing interest or incurring fees.

And if you turned down money but have reconsidered, contact your financial aid office. Most colleges and universities will reinstate an offer for federal student loans included in your original financial aid package.  

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.




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