subsidized vs unsubsidized loans

Difference Between Subsidized and Unsubsidized Loans

Louis DeNicola

Even if you’ve been saving money for college, many people still need to take out student loans to help pay for tuition and living expenses. Knowing how subsidized and unsubsidized student loans differ can help you set priorities and save money in the long run. Here’s a hint: the difference has to do with who pays the interest for certain periods of the life of the loan.

What is a Subsidized Loan?

A subsidized loan is a type of federal student loan that’s available to eligible undergraduate students. With a subsidized loan, the U.S. Department of Education (ED) pays the interest while:

  • You’re enrolled in an eligible degree or certification program at least half-time
  • You’re in the six-month grace period after you first leave school
  • Your loan is in deferment (an option to temporarily stop making payments)

The ED may also help pay the interest on your subsidized loans if you’re using specific income-driven repayment plans and your payments don’t cover the accruing interest. However, this benefit may only last for the first three years that you’re on the plan.

As a result, subsidized loans can cost you less than unsubsidized loans because you won’t pay as much interest overall. However, you need to meet the eligibility requirements.

What are the Requirements?

Along with the basic eligibility requirements for receiving federal financial aid, subsidized student loans have a few specific requirements. You must:

  • Be an undergraduate student at an eligible school.
  • Be enrolled at least half-time.
  • Demonstrate a financial need.

If you qualify, you may see the Direct Subsidized Loans listed as one of the options in your financial aid package.

What are the Pros of a Subsidized Loan?

Subsidized loans are the best federal student loan option for undergraduate students because the ED helps pay the interest. As with other federal student loans for undergraduates, you may also benefit from:

  • No income or credit score requirement
  • A fixed interest rate
  • Several federal repayment plans
  • Options for student loan forgiveness and cancellation

What are the Cons of a Subsidized Loan?

You may want to accept all your subsidized loans before turning to unsubsidized loans. However, limitations keep some students from taking out subsidized loans.

  • They aren’t available to graduate students or parents.
  • You’re only eligible during 150% of your program’s length. For example, up to six years if you’re in a four-year program.
  • The annual subsidized loan limit might not be enough to cover all your costs.

You’ll also still need to repay the loan and the interest that accrues during non-subsidized periods. In general, you should still prioritize financial aid that doesn’t need to be repaid, such as grants and scholarships.

What is a Direct Subsidized Loan?

A direct subsidized loan is another name for a subsidized federal student loan. The name refers to the fact that the loans are part of the William D. Ford Federal Direct Loan Program.

What is an Unsubsidized Loan?

An unsubsidized loan is a type of federal student loan that’s available to eligible undergraduate and graduate students. Unlike with subsidized loans, you generally have to pay all the interest that accrues on your unsubsidized loans.

What are the Requirements?

As with subsidized loans, you need to meet the basic eligibility requirements for federal student loans. Unsubsidized loans also have some restrictions, but not as many.

  • You can be an undergraduate or graduate student at an eligible school.
  • You must be enrolled at least half-time.

For both types of loans, you’ll need to submit a new Free Application for Federal Student Aid (FAFSA) each year to remain eligible.

What are the Pros of an Unsubsidized Loan?

Unsubsidized loans can help students who don’t qualify for subsidized loans or who need to borrow more money. They also:

  • Have higher loan limits than subsidized loans
  • Don’t require borrowers to have a financial need
  • Don’t have a time limit for taking out new loans

Subsidized and unsubsidized loans also offer many similar benefits:

  • No income or credit requirement
  • The same interest rate as subsidized loans for undergraduate students.
  • Eligible for multiple federal repayment plans
  • Can qualify for federal student loan forgiveness and cancellation

What are the Cons of an Unsubsidized Loan?

Unsubsidized loans may be the next-best option for some students, but beware that:

  • You have to pay all the interest that accrues while you’re in school, during the grace period, and during loan deferment.
  • There are still annual and aggregate loan limits.

For these reasons, it’s generally best to use subsidized and free forms of financial aid before turning to unsubsidized loans.

What is a Direct Unsubsidized Loan?

A direct unsubsidized loan generally refers to a type of federal student loan that’s available to undergraduate and graduate students and is part of the William D. Ford Federal Direct Loan Program. The Direct Loan program also has loans for graduate students and parents (PLUS Loans) that aren’t subsidized.

How Does Interest Work?

Congress sets the interest rate for different types of federal student loans each year. For undergraduate students, subsidized and unsubsidized direct loans have the same interest rate. Graduate students’ unsubsidized loans have a higher rate.

Your loan’s interest rate will be locked in (i.e., the loan has a fixed interest rate) when your loan is disbursed. If you take out several federal student loans while at school, the loans may have different interest rates based on when you received the funds.

Federal student loans start to accrue interest daily once they’re disbursed. The ED pays for the interest that accrues on subsidized loans during certain periods. But you’ll be responsible for all the interest on your unsubsidized loans.

With both types of loans, you don’t need to make any payments while you’re in school or during the six-month grace period after leaving school. You may also be able to temporarily stop making payments by placing your loans into forbearance or deferment.

However, any interest that accrues and isn’t subsidized may be capitalized—added to the loan’s principal balance—once you start paying the loan. Your interest rate can then apply to the new, larger principal balance. To keep this from happening, you can make partial payments against the interest that’s accruing.

How do Repayments Work?

Aside from the interest, there’s no difference when it comes to repaying subsidized and unsubsidized student loans. You have to start repaying the loans after a six-month grace period, which begins when you graduate, leave school, or are enrolled for less than half-time.

A student loan servicer will be assigned to manage your loans. The service should send you information about when your first payment is due, and you’ll send your payments to the servicer.

You may be automatically assigned the standard repayment plan, which has a 10-year term and fixed monthly payments. However, you can also choose from other repayment plans, including income-driven options that can be helpful if you’re struggling to afford payments. You can change your repayment plan at any time for free.

Take a big-picture approach to planning and repaying your student loans. For example, if you work full-time for an eligible government or non-profit organization, you may be able to get some of your debt forgiven through the Public Service Loan Forgiveness Program. However, you’ll need to repay your student loans with an income-driven repayment plan to qualify.

Or, your employers may offer student loan repayment assistance as a fringe benefit. You could try to use the benefit to pay off the loan with the highest interest rate. Or, focus on paying off the unsubsidized student loans first if you think you may need to defer your payments later.

Subsidized vs. Unsubsidized Student Loans

Whether you’re considering taking out student loans or repaying them as one of your financial priorities for the year, understanding the difference between subsidized and unsubsidized loans can be helpful.


Direct Subsidized Loans


Direct Unsubsidized Loans

Eligibility
Requirements

Undergraduate students with a financial need


Undergraduate and graduate students

Interest Rate
Fixed rate based on when the loan is disbursed


Fixed rate based on when the loan is disbursed

Loan Limits
Annual limits


Higher annual limits and an aggregate limit

How Interest Accrues
Daily, once your loan is disbursed


Daily, once your loan is disbursed

Who Pays the Interest During Enrollment and Deferment
The Department of Education


The borrower

Are Subsidized or Unsubsidized Student Loans Best?

If you can choose from subsidized and unsubsidized federal student loans, the subsidized loans are generally the better option. They can cost you less overall, and there aren’t any downsides when compared to direct unsubsidized loans.

In general, both types of federal loans are also a better option than private student loans. Private student loans can require good credit and income, and they may have higher interest rates and fewer repayment plans and benefits.

I hope you found this article helpful. What are your next steps to figuring out how you will pay for college? Let us know in the comments below.

Finance/Insurance Disclosure: This informational material shall not be considered financial advice. The Hartford assumes no responsibility for any financial, investment, or tax-related decisions. Those seeking resolution of specific financial, legal, tax, or business issues, questions, or concerns regarding this topic should consult their own financial, investment, tax, legal, or other business consultants, advisors, or other professionals.

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