Subsidized vs Unsubsidized Student Loans

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Point of Interest

Subsidized loans are based on financial need, and interest is paid for you while you’re in school. Unsubsidized loans accrue interest immediately, but they are not restricted to financial need.

Students who rely on financial aid might wonder about the difference between subsidized vs. unsubsidized loans. The federal government offers student loans to college-goers through both a subsidized and unsubsidized loan program.

Are you wondering whether you should get a private student loan or federal loan? Colleen Brown, director of financial aid at Columbia College, has some advice.

“Private loans are typically credit-based and often have an interest rate associated with the creditworthiness,” said Brown. “Federal loans also have other ‘benefits’ that private loans don’t have. For example, federal loans do have death and disability discharge where [with] private loans, it varies by loan product.”

Keep reading for a primer on the meaning of subsidized vs. unsubsidized.

What are subsidized and unsubsidized student loans?

Your college or university decides the amount it will give you of both Direct Subsidized and Unsubsidized Loans — and there is a maximum. While you’re enrolled in school at least half-time, both loan types can be deferred (meaning you don’t make payments), but you’ll still earn interest on unsubsidized loans. Thus, the question arises: Are unsubsidized loans worth it?

“A subsidized loan is one that the government pays interest (on) while a student is in school as well as during deferment,” Brown explained. “An unsubsidized loan is one that the student is responsible for the interest during the entire time the student has the loan. Both are types of Direct federal loans. They are both federally guaranteed and do not require a credit check or collateral. A student who is eligible for subsidized loans should utilize subsidized before unsubsidized due to the expense of capitalized interest.”

Who qualifies for these types of student loans?

There are eligibility requirements for federal student loans. For both subsidized and unsubsidized loans, requirements include:

  • Being a U.S. citizen or otherwise eligible
  • Having a social security number
  • Being registered with selective service
  • Being enrolled as a regular student at least half-time
  • Maintaining good academic standing

In addition to those requirements, Subsidized loans are offered based on financial need using the information provided on the Free Application for Federal Student Aid (FAFSA). 

How much can you borrow?

Subsidized and unsubsidized loans have different borrowing limits, and those limits change depending on where you are in your schooling. There’s a total borrowing limit for each year, and only a portion of that may be borrowed in unsubsidized loans. If you don’t take out subsidized loans, you can borrow the overall limit in unsubsidized loans:

YearTotal LimitSubsidized LimitUnsubsidized Limit
First$5,500$3,500$2,000/$5,500
Second$6,500$4,500$2,000/$6,500
Third or Later$7,500$5,500$2,000/$7,500

Essentially, if you take out the maximum in subsidized loans each year, you can take out an additional $2,000 in unsubsidized loans. Otherwise, you may take out the total limit minus however much you’re borrowing in subsidized loans. If you’re considered an independent student, the subsidized limits remain the same, but the total and unsubsidized limits are $4,000-$5,000 greater each year. 

The aggregate student loan limit is $31,000 — including up to $23,000 in subsidized loans. For dependent students, the aggregate limit is $57,500 — of which $23,000 may come from subsidized loans.

Subsidized vs unsubsidized: How to choose

Of the two types of student loans, a subsidized loan is the best option for low-income students because the U.S. Department of Education (DOE) covers interest payments while the student’s in school.

Subsidized loans are at your disposal for up to 150% of the amount of time it should take to complete your degree program. For example, you can only receive subsidized loans for six years on a four-year degree. Even if you switch programs, your past loans still count toward your new total.

On the other hand, unsubsidized student loans are useful if you have a job or are dependent on parents who earn too much to get other aid. You’ll need to be at least a half-time student to get an unsubsidized loan. The drawback? On these loans, interest starts accumulating the day they get disbursed.

According to the Office of Federal Student Aid, a $10,000 Direct Unsubsidized Loan with a 6.8% rate accrues $1.86 in interest per day. For current students, interest is added to the balance (or capitalized) after the deferment, forbearance, or grace period ends. Then you’re paying interest on your interest. To avoid this, try to make interest payments while in school or during your grace period.

Repayment options

There are a variety of repayment plans available. Most borrowers will be automatically enrolled in the Standard Repayment Plan, which is scheduled to pay back your loans over the next 10 years. If you’re carrying a lot of student loan debt after finishing school, you could opt for a Graduated Repayment Plan, instead. Under this plan, payments start at a lower amount and gradually increase over the life of the loan (10 years). Graduated plans are more costly in the long run, but will be more affordable right after you graduate. 

There are also REPAYE (revised pay as you earn) and IBR (income-based repayment) options, which take income into account when determining your monthly payments.

FAQs

What is better: subsidized or unsubsidized loans?

Neither type of loan is strictly better than the other — each offers different advantages. Subsidized loans accrue less interest overall, but they’re based on need. Unsubsidized loans will start accruing interest sooner, but they have no restrictions around need or income.

Do you have to pay back unsubsidized loans?

Yes. Both subsidized and unsubsidized loans require repayment.

Should you pay off subsidized or unsubsidized loans first?

Unsubsidized loans start accruing interest while you’re still in school, which means you may end up paying interest on your interest. Paying off unsubsidized loan interest in school will help avoid that issue if you can afford it.

What are subsidized loans?

Subsidized federal loans are loans given out based on the student’s need — meaning that not all students qualify for them. The Department of Education pays interest on the loans while you’re in school, which leads to lower overall cost compared to an unsubsidized loan for the same amount.

The Final Word

For anyone confused about subsidized vs. unsubsidized loans, it’s relatively simple. Both are federal student loans that have the same fixed interest rates. However, subsidized loans receive subsidies, or assistance, from the federal government for the interest you owe while you’re in school. So, when you graduate, your loan won’t have gained interest. An unsubsidized loan doesn’t have the same benefit — it accrues interest while you’re studying.

Are you worried about paying down that interest on your unsubsidized loan? Try to work part-time during college or during school breaks to pay back interest and start paying off the balance of your loans. Also, develop a plan to tackle the debt after you start your career and stick to it so you can contribute more to your next financial goals, such as buying a house or saving for retirement.

Tiffany Verbeck

Personal Finance Contributor

Tiffany Verbeck is a personal finance expert. She uses her storytelling skills gained from a master’s degree in writing to run a freelancing business focused on helping people make and manage their money.