Subsidized vs. Unsubsidized Student Loans

Ben Luthi
subsidized vs unsubsidized student loans
subsidized vs unsubsidized student loans

As a college student or the parent of a student, it’s important to know what financing options are available if you can’t pay for school on your own.

Both Direct Subsidized and Direct Unsubsidized Loans are types of federal student loans available to students who qualify, but the differences are important and can either save or cost you money.

Subsidized vs. Unsubsidized student loans: What you need to know

To qualify for Subsidized and Unsubsidized Loans, you need to be attending an eligible school at least half-time and working toward a degree or certificate. Based on your financial need, you may qualify for one or both loan type. Here’s how each one works.

Subsidized Loans

Direct Subsidized Loans are undergraduate student loans and are available to students with financial need. There’s no credit check.

If you’re attending school at least half-time, then the U.S. Department of Education will cover the interest that accrues on your Subsidized Loans while you’re in school and for the first six months after you leave school. Also, interest does not accrue if your loan is placed in a deferment.

The amount you can borrow with Subsidized Loans is determined by your school, and cannot exceed your financial need. The maximum amount you can borrow in Subsidized Loans each year as an undergrad are:

  • First year: $3,500
  • Second year: $4,500
  • Third year and beyond: $5,500

The total amount of Subsidized Loans you can have as an undergrad is $23,000. The interest rate for Subsidized Loans is 5.05% through June 30, 2019, and the loan fee, which is deducted from the amount you receive, is 1.062% through September 30, 2019.

Unsubsidized Loans

Direct Unsubsidized Loans are available to both undergraduate and graduate students and don’t require financial need to qualify. Undergrads can qualify for both Subsidized and Unsubsidized Loans. There’s no credit check requirement.

Like Subsidized Loans, interest starts accruing immediately with Unsubsidized Loans. The difference is that the government doesn’t cover the cost for you. So, if you don’t make interest-only payments while you’re in school, that interest will capitalize when you start making payments, increasing your principal balance.

Your school will determine the amount you can borrow with Unsubsidized Loans each year, and there’s an annual limit based on your year in school and whether you’re a dependent or independent student based on your FAFSA:

Dependent studentsIndependent students
First-year undergraduate$5,500 total between unsubsidized and subsidized$9,500 total between unsubsidized and subsidized
Second-year undergraduate$6,500 total between unsubsidized and subsidized$10,500 total between unsubsidized and subsidized
Third year and beyond undergraduate$7,500 total between unsubsidized and subsidized$12,500 total between unsubsidized and subsidized
Graduate or professionalN/A$20,500
Total$31,000 total between unsubsidized and subsidized$57,500 total between unsubsidized and subsidized for undergraduates; $138,500 total between unsubsidized and subsidized for graduate and professional students

The Unsubsidized Loan interest rate is 5.05% for undergraduate students and 6.6% for graduate and professional students, through June 30, 2019. The loan fee stays the same at 1.062% through September 30, 2019.

Private vs. Subsidized vs. Unsubsidized student loans

In addition to federal loan options, students can also borrow money through private lenders. Private student loans can often offer competitive interest rates, especially compared with what’s available for graduate and professional students.

The caveat is that you need to have excellent credit — or a co-signer with excellent credit — to qualify for the best rates. Plus, private student loans don’t typically come with some of the benefits you get with federal loans, such as income-driven repayment plans, which can lower your monthly payment based on your income and family size, and student loan forgiveness programs.

Also, while some private student lenders offer forbearance and deferment options, they may not be as generous as the federal government’s provisions.

Private student loans are best used when you can qualify for a better interest rate than what the Department of Education offers and you don’t need federal loan benefits, or you’ve maxed out the amount you can borrow with Subsidized and Unsubsidized Loans. If you’re interested in comparing private student loan interest rates, use our rate comparison tool.

Subsidized vs. Unsubsidized student loans: How to apply

The process of applying for Subsidized and Unsubsidized Loans requires you to fill out the Free Application for Federal Student Aid (FAFSA) form. This form helps you demonstrate your dependency status, as well as your financial need.

To start, create a Federal Student Aid (FSA) ID, then visit to fill out the form online. If you’d prefer another option, you can also complete the form in the myStudentAid mobile app or on paper.

You’ll need several documents and pieces of information for yourself and your parents if you’re a dependent student, including:

  • Your and your parents’ Social Security numbers
  • Driver’s license number
  • Alien Registration number if you’re not a U.S. citizen
  • Tax returns for you and your parents
  • Untaxed income records for you and your parents
  • Information on other assets you or your parents hold

If you need help with the process, you can contact the Department of Education or your school’s financial aid office. The deadline for submitting the FAFSA form can vary by state, so check with your school’s financial aid office to find out and make sure you submit your application by that date.

The bottom line

When considering subsidized loan vs. unsubsidized loan terms, the differences are big enough that it’s important to know them so you can make good decisions about financing your or your child’s education.

There’s not much need to compare Subsidized vs. Unsubsidized Loans to find out which one is best for you. If you qualify for Subsidized Loans based on your financial need and you plan to borrow anyway, then take advantage of the benefit of having the federal government cover your interest payments.

Just keep in mind that you may also need Unsubsidized Loans or private student loans to cover your full cost of attendance. If this happens, carefully consider each option and compare interest rates to find the best deal for you.

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