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

Federal loans for students generally come in the form of Direct Subsidized Loans or Direct Unsubsidized Loans.If you’re looking at getting either of these types of loans it’s important that you pay attention to the differences - here are the main things to know:
Author: Russell White
Russell White

Writer, Contributor


As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Russell White

Writer, Contributor


As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.
Author: Russell White
Russell White

Writer, Contributor


As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO


Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Table Of Content

If you’re planning on going to college you should know that most students need some kind of loan to help them. Whether it’s a federal loan or a private one, it’s generally going to be a necessity (even if you don’t want it). Those federal loans generally come in the form of Direct Subsidized Loans or Direct Unsubsidized Loans. The subsidized version is the kind that doesn’t add interest while you’re in school, which is definitely a bonus. 

Student loans account for a significant portion of consumer debt. However, the type of degree can influence the amount of debt. This chart using data from the New American Federal Education Budget Project shows that medicine and health sciences degrees represent the highest average debt amount, followed by law degrees.

At the other end of the scale, a Master of Business Administration attracts less than 3% of the average debt compared to medicine and health science degrees.

Average Debt Amount For Common Degrees

Now, if you’re looking at getting either of these types of loans it’s important that you pay attention to the differences. That way, you can know how the loan is really going to work, how you’re going to pay it, what you’re going to end up paying and more.

What Are Subsidized Student Loans?

A Direct Subsidized Loan has an interest rate that’s set by the government, which means you don’t need to have any specific credit score and you also don’t need to worry about the rate changing at all. On the other hand, you’re only going to be approved for a set amount of money. That’s because you have to be eligible based on financial need. Your FAFSA form is going to be the best way to find out what you qualify for here.

The federal government will look at your FAFSA and will then decide just how much financial need you have. What’s really great about this type of loan, however, is that your interest while you’re in school and during the deferment period is actually paid off by the government. As long as you are enrolled half time and for 6 months after you graduate you won’t have to pay any interest at all and when you get to your loan after that 6 months it’s going to be the exact same amount that you borrowed in the first place. Once that deferment period ends though you’re going to be responsible.

Tuition fees can vary from institution to institution, but how is this reflected in student loan debt across the various states? In this chart compiled from figures, we can see that the District of Columbia has the highest average student loan debt at $55,400, this is significantly higher than the next highest state, Maryland at $42,700. After this point, the difference in average student debt is less than $1,000, showing that these states have very similar levels of student debt.

Highest Average Student Loan Debt by State

One of the downsides here is that you’re going to only be eligible during your undergraduate years. Still you can get some great benefits even if you have to defer your loans later on.

The Benefits of Subsidized Loans

  • The Government Pays the Interest – This is definitely the biggest benefit and the best way that you’re going to save money on your loan. You’re not going to have to pay the interest that accrues during the time that you’re in school or for the first 6 months after you graduate or stop attending. This could actually save you thousands of dollars depending on the amount of money you get.
  • Lowered Interest – This type of loan is going to have a low interest rate and that rate can’t go up during the life of the loan. Plus, it doesn’t matter what your current credit score is or what your history is like with other types of loans. You’ll still get the same rate, which in 2019 is 5.05%.
  • Protection During Hardship – If you fall on some hard times and you need to defer your loan you’re going to have the opportunity to do so with this type of loan. You’ll also have interest paid for you during certain periods, including during eligible deferments and forbearance. Plus, some repayment plans will pay the interest for you as well, which means you can get a whole lot of assistance.

The Drawbacks of Subsidized Loans

  • Getting Approved – In order to get these loans you have to be enrolled at least half time and you need to be going to a school that participates in the program. You’re also going to need to be pursuing some type of degree or certificate and you need to be working toward an undergraduate program, not a graduate degree.
  • Limits on What’s Available – There’s a specific amount of money that you can be eligible for in your lifetime, which means that you can only get that amount. The amount also varies based on what year you’re in for your schooling. Once you hit the limit you’re not going to be able to take out any more money.
  • Fees – You may have to pay an origination fee when the loan is taken out and that’s not going to be deferred.

What Are Unsubsidized Student Loans?

Unsubsidized loans are going to charge you interest from day one, even though you don’t actually have to start making payments that early. What happens is you’re going to complete your FAFSA just like with the subsidized loans and then you’re going to be declared eligible. You don’t need to demonstrate financial need here though. Instead, you’re probably going to be offered enough unsubsidized loans to pay for the rest of your term or year. What happens here is that you’re going to be responsible for the interest, but it won’t be charged to you until you stop attending school at least half time.

At the time that you graduate or stop attending school the amount of the interest during that time is added to the total that you borrowed and you start making payments. You do get a 6-month deferment here as well, but there’s still going to be interest adding on.

What’s great about this one, however, is that you can generally get as much money as you need because there’s no requirement for you to prove financial hardship. You can also get this type of loan whether you’re going for your graduate or undergraduate degree.

The Benefits of Unsubsidized Loans

  • High Limits – You can generally get as much money as you’re going to need with this type of loan. For an undergraduate student the limit is approximately $31,000 and for a graduate student it’s generally $20,500 per year or $138,500 in total. But that’s definitely going to get you further than what you’ll probably qualify for in subsidized loans.
  • Easy Eligibility – You don’t have to qualify for this loan with specific financial need, which is going to make it easier to get the money. You will still have to file the FAFSA form however and your eligibility will be determined from there.

The Drawbacks of Unsubsidized Loans

  • Paying Interest – You’re going to be responsible for the interest on your loan from the moment that you take it out. There’s no grace period here. That means you could end up spending a pretty large amount of money and when you start making those payments your total will be more than what you borrowed because of that interest.
  • No Legal Protection – If you default on your loan there’s no protection here. The government can actually garnish your wages and they don’t even need to get a court judgement in order to do it. Plus, they can take your tax refund from your income tax.
  • Fees – You may have to pay an origination fee on this type of loan as well as a subsidized one.

Subsidized vs. Unsubsidized: Where to Go

When you’re looking at the different types of loans the best thing you can do is definitely to get a loan that will help you with your schooling. Whether you have to pay interest from the start or later, however, is definitely going to make a difference in your total payments.

If you’re going for an undergraduate degree you’re going to get the same interest rate with either option, which means you’re going to want to go with a subsidized loan if at all possible. You won’t have to pay as much in interest with this option. On the other hand, an unsubsidized loan is generally going to give you some better options, but it’s going to depend on a number of different things.

How to QualifyDemonstrate financial needFill out FAFSA
&What You Can BorrowMax of $23,000$57,500 for undergraduates, $138,500 for graduate
What Happens to Interest?Education Department pays interestInterest accrues
Grace Period6 month grace period6 month grace period
Who can borrowUndergraduate students onlyUndergraduate and graduate or professional degree students
2021 interest rates3.73%3.73%  for undergraduates, 5.28% for graduate

No matter which of these loans you’re looking to apply for you need to fill out the FAFSA form. From there, you’ll be given information about what type of financial aid you actually qualify for, including aid that’s provided directly by the school.

What About Private Loans?

If you don’t have financial need or if you’re working toward a graduate degree you’re not going to have the option for subsidized loans. That means you may need to take a look at unsubsidized loans, PLUS loans or private loans.

If you can only get a PLUS loan or an unsubsidized loan you may find that the interest rates are better with a private loan. Also, if you have a cosigner that will help you out this is even more likely, in spite of its not always necessary. After all, PLUS loans are usually set at 7.6% interest and private loans can be quite a bit lower.

This type of loan comes directly from your financial institution (or any financial institution) and it has nothing to do with the government. You usually have to have credit history and at least halfway decent credit in order to get approved or you need to have a cosigner. On the other hand, you generally won’t have a limit to how much you can borrow and you may have a high or low-interest rate.

If you can’t qualify for federal loans at all this might be your only option. But if you have the ability to get federal loans, even unsubsidized ones, this is generally going to be the last thing you want to do. If you end up with problems paying back a private loan it could end up on your credit report and it could make things difficult for you for a whole lot longer. Not to mention it can cause some problems for your cosigner if you end up defaulting on the loan. Make sure you’re paying attention to the options in your financial aid package and that you’re getting the best possible loans.

How To Choose Between Them?

Before you choose, make sure to understand how much you needs and what are your options, based on your personal situation.

1. Understand How Much You Should Borrow?

Before considering loans, you should carefully consider how much your tuition and college costs would cost, and then look into how much you might be able to save through scholarships or grants.

You'll have to wait until it's time to make the installments to figure out how much you can really afford. You must understand how much you must pay each month. The amount you owe each month is determined by three factors: how much you borrowed, how much interest you're paying, and how long you have to pay it back.

If you have more time to pay it back, you will likely owe less per payment, but you will be in debt for a longer period of time. If you pay less interest, your payments will be smaller as well, allowing you to get out of debt more rapidly.

When it comes to deferment, you might completely stop making payments, including interest. Whether you have a subsidized Stafford Loan or a subsidized direct loan depends on the type of loan you have. To discover more about your alternatives, you should speak with your loan provider.

2. Qualify For Federal Loans & Financial Aid If You Can

Next, check to see if you qualify for federal loans before considering private loans. In most circumstances, you'll get better terms. You'll  profit from cheaper interest rates in most cases and get the rest of the benefits federal loans offer.

In addition, if you are eligible for financial aid to help pay for your education, it might save you a lot of money in the long term.

3. Compare Private Loans

When it comes to federal loans, you'll get whatever the government wants you to get. You'll be provided particular terms, which you can accept or reject. You are not allowed to make any decisions for yourself. A private loan, on the other hand, gives you a lot of possibilities. You get to choose who you want to deal with, what fees you may expect, and what terms you accept.

Make sure you're not only looking at rates but also other terms when you go through this procedure. You'll want to make sure you have some extra features, such as the ability to earn reduced interest rates if you set up automated payments or forbearance options. When considering any form of private student loan, look for flexible payment alternatives and more.

Any student loan you take out will almost always come with a grace period. These offer you a fixed amount of time between graduating (or ceasing to attend school) and having to begin making payments. Each loan has its own grace period, and some loans may not even have one at all.

A grace period is essential if you need to gather funds before you can begin making payments. However, keep in mind that you can begin paying payments at any time. You don't have to wait for the grace period to end, especially when interest may be accruing during that time.

Subsidized vs. Unsubsidized - FAQs

If you have a direct unsubsidized loan, you can choose to pay interest during your time in school. Conversely, you may choose to wait until your enrollment has ended.

Many school offices recommend that you pay interest first in an effort to reduce your school loan debt. It’s important to note that if you do not pay your interest, it will be capitalized and added to your total repayment amount.

One of the main perks of unsubsidized and subsidized student loan offers is PSLF access. Thanks to PSLF, you can have your remaining student loan debts forgiven and tax-free as long as you have made 120 payments.

To be approved by PSLF, you must participate in one of the four eligible repayment plans mentioned earlier. As a borrower, you will need to fill out a PSLF forgiveness form. If there are unsubsidized graduate loans that need to be repaid, you can benefit quite a bit from this.

In short, when you apply for aid through FAFSA (Free Application for Federal Student Aid), subsidized loans are only provided as needed and only for undergraduates.

Usually, you will find out how much you can borrow for subsidized loans from a particular school through the school’s financial aid program. The university sets these amounts separately. If you are eligible for a subsidized loan, it will become part of your offer.

Compound interest is collected based on the total loan balance, including principal and accrued but unpaid interest (interest charged on the loan but not paid). Therefore, compound interest involves charging interest on interest.

If the loan balance starts at $10,000 and the interest due in one year is capitalized, the new loan balance becomes $10,500 ($10,000 + $500), and the accrued interest for the second year is $525 (10,500 x 0.05).

Through subsidized direct loans, the bank or the government will pay your interest during your school period, if you need to extend the loan, and during your grace period after graduation. During these periods of time, you are responsible for repaying the exempted interest through subsidized loans.

Once you begin making repayments, the government will stop paying the interest. Your repayment amount consists of the old loan amount and its interest accumulated from that point.

It’s almost always better to pay off any unsubsidized student loans that have the highest interest rates. So if you have both types of student loans, you will want to focus on repaying the unsubsidized loans first. Then, you can start chipping away at the subsidized loans with higher interest rates.

Subsidized loans with the lowest interest rates will generally make you spend less, so these should be left to the end. By paying off your unsubsidized loans first, you will find yourself enjoying more financial freedom as you work to eliminate your debt.

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