Student Loans

What Is Better Subsidized Or Unsubsidized Loan

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

The vast majority of college students borrow money to cover their expenses. However, first-time borrowers may find it difficult to read financial aid award letters due to the wide variety of student loan options offered.

In contrast, the amount you owe after graduation and the way interest accumulates with some federal repayment schemes can be affected by the type of loan you take out. And it can have repercussions for the duration and total amount of your loan.

For this reason, it is helpful to be aware of the differences between the several federal student loan programs before deciding on one to employ for your education.

Key Differences Between Subsidized and Unsubsidized Loans

Direct loans, so named because they are borrowed straight from the U.S. Department of Education, are the most common type of student loan (ED).

There are two types of these loans: subsidized and unsubsidized. Students with shown financial need can apply for subsidized loans, but unsubsidized loans do not take need into account.

However, that isn’t the sole distinction. By comparing the two types of loans side by side, you can see why taking out the maximum amount possible in subsidized loans is always the best option.


Each year, you must submit a new FAFSA (Free Application for Federal Student Aid) if you want to be considered for federal student financial aid. Instead of sending the form directly to the federal government, you should submit it through your school’s financial assistance office.

Your assets and income will be requested on the form. Undergraduates who are reliant on their parents for financial support must also submit this data.

After that, you will receive a financial aid award letter from your school outlining your eligibility for various forms of help and the maximum amounts you may borrow in subsidized and unsubsidized student loans. Eligibility for federal student funding is based on the information you provide on the Free Application for Federal Student Aid (FAFSA).

The following conditions must be met in order to be considered for a direct loan:

  • You’re a U.S. citizen.
  • You have a high school diploma or a GED.
  • You are attending a school that participates in the federal student loan program at least half-time.
  • You are making commendable academic progress.
  • You’re not in default on a federal student loan.

Each variety of loan has its own set of stipulations.

Eligibility for Subsidized Loans

Undergraduates with exceptional financial need are the only people eligible for federal direct subsidized loans. The Education Department defines “financial need” as the amount required to cover the cost of education less the amount that may be reasonably expected from the student’s family. Plus, if you qualify for a subsidized loan, you can borrow up to the loan limit.

Approved funding varies from institution to institution and is based on the total cost of attendance. Subsidized loans are not available to students pursuing a graduate or professional degree.

Eligibility for Unsubsidized Loans

Both graduate and undergraduate students can apply for unsubsidized loans. Federal direct unsubsidized loans are available regardless of a borrower’s financial situation. There are, however, yearly and cumulative borrowing caps that shift from enrollment year to enrollment year.

Since you cannot borrow more than you need to cover the full cost of attendance, the maximum amount you are eligible to borrow in unsubsidized loans is set by the institution you attend.

That is to say, you are only allowed to borrow the amount that is necessary to bridge the gap between the entire cost of attendance and any other forms of financial help (such subsidized loans, scholarships, and grants) you get.


Interest rates on federal direct loans (both subsidized and unsubsidized) are often lower than those on private student loans, with the exception of rates on PLUS loans (which are higher than those on other federal loans).

This is due to the fact that federal law, and not your credit score, determines interest rates. While interest rates may fluctuate from year to year, they cannot go over 8.25% (10.5% for graduate and parent PLUS loans) under federal law. Interest rates on private student loans may exceed 14%.

Interest accrual (building up) on loans is the major distinction between subsidized and unsubsidized student loans. This distinction is what sets subsidized loans apart as the best option for college funding.

Interest on Subsidized Loans

It’s important to note that a subsidized student loan does not come with no interest. The instant a school receives a loan payment, interest charges will be added automatically. 

However, there are periods when debtors are excused from making interest payments.
The government instead steps in to shoulder the cost. This is why the loan is referred to as a “subsidized” loan. To help people out, the ED is subsidizing interest rates for borrowers right now. Among these are:

  • While you are enrolled at least half-time in school During the six-month grace period following graduation
  • During deferral periods (but not forbearance) You are enrolled in an income-driven repayment plan for the first few years (how much they cover and for how long depends on the plan)

If you didn’t make any payments while you were in school, the balance will be the same as what you borrowed since the government will pay the interest on your loan until you make your first payment.

This means that if you took out a $40,000 loan, you will have a $40,000 debt for the first six months after you graduate.

Interest on Unsubsidized Loans

In the case of unsubsidized loans, the ED does not pay the interest unless the borrower enrolls in the REPAYE income-driven repayment plan and meets the program’s eligibility requirements.

Interest starts accruing the day your school gets the loan funds, even though you don’t have to start making payments until six months after you graduate or drop below half-time enrollment.

Even worse, the interest accumulates after you graduate. In other words, it will be added to your current total. As your debt grows, so does the interest you pay on it.

Unsubsidized student loan debt after four years at the highest allowable rate of 3.73 percent would amount to $28,257 if borrowed to cover the full cost of attendance. What a reasonable rate of interest! It’s possible to reach 8.25%.

Loan Limits

There are limitations on the total amount of subsidized and unsubsidized loans you can get under the Federal Direct Loan Program, both on an annual and cumulative basis. The annual and cumulative restrictions are different for each enrollment year, dependent status, and level of study (undergraduate, graduate, or professional).

The vast majority of freshmen are financially dependent students. Furthermore, all postsecondary learners are viewed as mature adults. An independent undergraduate is defined as follows for the purposes of federal student assistance eligibility:

  • At least 24 years of age
  • Married
  • A veteran A member of the armed forces An orphan
  • A court-appointed ward
  • Anyone who has legal dependents other than their spouse
  • A juvenile who is emancipated
  • Someone who is homeless or is on the verge of becoming homeless

Although dependent undergraduates do not strictly fulfill the criterion of independence, the ED permits them to borrow up to the increased limits of independent students by taking out federal direct PLUS loans.

It is not possible to borrow more than the difference between the full cost of attendance and any other forms of financial help you receive and the federally-mandated maximum loan amount.

PLUS loans and private loans can assist bridge the funding gap between the total cost of attendance and other forms of financial aid if the federal loan limitations on subsidized and unsubsidized direct loans are not sufficient.

Whether you’re applying for a subsidized or unsubsidized loan might also affect your borrowing cap.

Bottom Line

The Education Department (ED) administers the Federal Student Loan Program, which includes both subsidized and unsubsidized student loans. However, if you are eligible, subsidized student loans will save you money in the long term. So, first exhaust all possibilities with the subsidized loans included in your financial assistance package before considering taking out any unsubsidized loans.

And have those paid off entirely before considering private loans. Lessening your interest payments will save you money throughout the life of your loan. And if your new degree helps you obtain a well-paying new job, you may be able to pay off your loans more quickly after graduation.

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