Subsidized vs. Unsubsidized Student Loans: What’s the difference?

Jon O'Donnell Updated on May 16, 2017

If you have to borrow money, subsidized loans should always be your first choice

What’s the best way to pay for college? “Free money,” of course. Those are the grant or scholarships funds that you won’t have to worry about paying back later.

But if you’re like many people, those funding sources won’t be enough to pay for your entire college education. So where should you turn next?

If you have to borrow money, subsidized student loans are your smartest option if you qualify.

What, exactly, are subsidized student loans? How do they differ from other kinds of loans? How do you go about getting one?

Let’s talk about the difference between subsidized and unsubsidized student loans so you can have a better understanding of what you’re applying for and why it matters.

What is a Subsidized Student Loan?

A subsidized student loan is a loan offered by the federal government. While it is a loan and not a grant, subsidized student loans still come with a certain amount of so-called free money. With these loans, the subsidy comes in the form of the government helping the borrower to repay the loan.

So how do subsidized student loans work?

Many student loans, including those from private lenders, require the borrower to begin making payments on the loan while the student is still in school. Sometimes those payments are full-principal plus interest payments, and sometimes they are interest-only payments.

With subsidized student loans, the government steps in and makes interest-only payments on the loan while the student is still in school. Obviously, this can save the borrower quite a bit of money over the years he or she is in school.

For example, the yearly interest on a $4,000 loan is about $260. With a subsidized student loan, the federal government repays that amount on your behalf. So over four years of college, a $4,000 subsidized student loan vs. other types of loans could save you over a thousand dollars.

Note: All subsidized student loans are offered by the federal government. Private subsidized student loans do not exist.

How Do You Apply for a Federal Student Loan?

To apply for a subsidized or unsubsidized federal student loan, simply fill out the Free Application for Federal Student Aid (FAFSA).

Once the government receives your application, it forwards your information to the colleges or universities that you listed on your FAFSA.

The schools that decide to accept you will send you an acceptance letter and a financial aid package. The financial aid package will generally include information about federal and state grants, as well as your eligibility for federal subsidized and unsubsidized student loans.

Let’s pause here for a moment to clarify two things that people often get confused about:

  • Even though the FAFSA is a government application, your financial aid package will come from the colleges that you have applied to. You will not get an award letter from the federal government.
  • You may get more or less federal financial aid depending on which school you attend.

After taking into account the “free money” we mentioned above, it’s generally best to accept all subsidized loan dollars offered to you, followed by federal unsubsidized loans and then private loans, as necessary.

Who is Eligible for a Subsidized Student Loan?

Subsidized student loans may appear to be a great deal … and they are if you can get one. However, not everyone is eligible.

Generally, subsidized loans are offered to students who can demonstrate financial need. Subsidized loans are not available for graduate students.

In addition, these loans have maximum limits that may not be enough to fully fund your education, so additional loans may be necessary.

For example, a first-year student may be eligible to borrow up to $3,500 in subsidized student loans, a second-year student may borrow $4,500, and third-year students and beyond may borrow up to $5,5000. (See this page from the Department of Education for more information.)

What is an Unsubsidized Student Loan?

If you don’t qualify for subsidized student loans, the government also offers unsubsidized student loans.

Unlike subsidized loans, these loans are not based on financial need. You, as the borrower, are solely responsible for repayment, including any payments due while you’re still in school.

These loans operate in a similar fashion to a loan from a bank or private lender. But because they’re offered by the federal government, they often offer lower interest rates and fees.

However, these loans also have maximum limits, so additional loans could be needed.

When Do You Start Paying Repaying Your Loan?

Many federal loans allow a grace period before you’re required to begin repayment. The grace period, which is often around six months, generally begins after you leave school or drop below half-time enrollment.

It’s important to note that interest may accrue during your grace period. If you’re able to start making payments before the grace period has expired, you’ll save yourself money on the life of the loan.

What if You Can’t Pay?

Certainly, most college students hope to be gainfully employed not long after graduation. Still, it’s always a good idea to know what your options are should you find yourself in the unfortunate position of not being able to pay back your loan right away.

Here again, subsidized student loans can offer some reassurance. If you’re unable to pay for any reason, you can exercise one of two options: deferment or forbearance.

Deferment allows you to lower or postpone payments for up to three years, often without interest accrual during the time of nonpayment for subsidized loans. Unsubsidized loans may also allow deferment, but interest is usually charged during those period.

Forbearance lets you stop making payments for up to a year; however, interest will continue to accrue during that time.

What if You Still Need Money for College?

If you’re not able to fully fund your education through grants, scholarships, and federal loans, you may need to investigate private student loans

Download our free guide Private Student Loans 101 to learn more.

Published in: Federal Student Loans

About the Author
Jon O'Donnell

Jon O'Donnell is a staff writer and marketer who is passionate about bringing transparency to the student loan process. Jon has a long history of connecting people with educational opportunities to help them improve their careers and their personal finances. When Jon isn't informing people about how to make smart financial decisions, you can probably find him in the kitchen attempting to cook like the Iron Chef he wishes he was. Read more by Jon O'Donnell

Recommended Student Loan Lenders

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  
3.54% - 12.07%1 Variable & Fixed 8 - 15 years

Undergrad & Graduate Student & Parent Learn More

View Disclosure

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  
3.95% - 12.10%1 Variable & Fixed 5 - 15 years


Undergrad & Graduate Students Learn More

View Disclosure

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  
4.00% - 11.86%1 Variable & Fixed 5 - 15 years*

Undergrad & Graduate Students Learn More

View Disclosure

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  
3.94% - 12.09%1 Variable & Fixed 5 - 15 years

See Examples

Undergrad & Graduate Student & Parent Learn More

View Disclosure

Lender Rates (APR) Loan Types Terms Eligible Degrees Eligible Loans  
3.04% - 9.67%1 Variable & Fixed 5 - 15 years

Undergrad & Graduate Students Learn More

View Disclosure


Do you still have a gap to fund your education?

If so, check out these 6 featured lenders:

Find your best option