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Unsubsidized vs. Subsidized Student Loans: What Does Each Loan Type Mean?

To help students cover higher education costs, the U.S. Department of Education runs a federal direct loan program. Within the program, student borrowers can qualify for one of two types of federal student loan options: subsidized and unsubsidized.

Subsidized loans are offered to students with financial need. For these loans, the government will cover the interest while you're in school.

Unsubsidized loans are offered to students without extreme financial need. If you get an unsubsidized loan, the loan interest will accrue, even in periods of deferment.

Let's dig into how each of these loans work.

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Unsubsidized loans

Unlike subsidized loans, unsubsidized loans, also known as direct unsubsidized direct 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.

How unsubsidized loans work

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 borrowing limits, so additional loans are often needed. For example, the maximum loan limit for a first-year college student is $5,500, which is generally not enough to fund an entire academic year. Many students opt to take private student loans to cover any additional tuition gaps that remain after scholarships, grants, and federal student loans. 

Subsidized loans

Subsidized loans, also called federal direct subsidized loans, do not accrue interest while you’re still in school.  In order to qualify for subsidized loans, you have to demonstrate financial need. Subsidized loans are available only for graduate students. 

How subsidized loans work

For both federal and private student loans, you are charged interest from the day the loan money is paid to you or your school. That means that even while your loan payments are deferred you're still racking up interest unless you're making monthly payments. When you graduate, the interest is "capitalized," meaning that it's added to the original loan balance. 

With subsidized student loans, the government steps in and makes interest-only payments on the loan while you're still in school. When you graduate, your loan balance should be pretty close to your original loan balance.

For example, the yearly interest on a $4,000 federal 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.

Key differences between unsubsidized and subsidized loans

  • Unsubsidized loans accrue interest while you’re still in school. 
  • The government pays interest on subsidized loans until the end of your 6 month post-graduation grace period. 
  • Unsubsidized loans are available to both undergraduate and graduate students. 
  • Subsidized loans are available only to undergraduate students. 
  • To qualify for subsidized loans, you have to demonstrate financial need.

Eligibility: Who qualifies for federal student loans?

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

Eligibility: Subsidized federal student loans

Eligibility requirements for subsidized federal student loans include: 

  • You're a U.S. citizen.
  • ​You demonstrate financial need.
  • You've applied or enrolled as an undergraduate student. Grad students are not eligible for subsidized loans. 
  • You're enrolled or plan to enroll at least half-time at a school that participates in the federal student loan program.

Eligibility: Unsubsidized federal student loans

Eligibility requirements for unsubsidized federal student loans include: 

  • You're a U.S. citizen
  • ​You've applied or enrolled as an undergraduate student, graduate student, or professional student. 

You're enrolled or plan to enroll at least half-time at a school that participates in the federal student loan program.

How much can you borrow?

Both subsidized and unsubsidized federal student loans have annual loan limits and aggregate loan limits. These limits may mean that you need to take out additional loans from a private lender in order to pay the full cost of attendance. 

Annual loan limits, or the total amount you can borrow per year, depend on your grade level, as well as whether you're a dependent or independent student. Independent students can typically take out more federal student loans than dependent students. 

Aggregate loan limits, or the cumulative loan amount you can owe at any given time, change based on your program (undergraduate, graduate, and professional), as well as whether or not you're a dependent or independent student. 

Borrowing limits: Undergraduate & graduate/professional students 

Academic Year 

Annual Loan Limit (unsubsidized)

Aggregate Loan Limit (unsubsidized)

Annual Loan Limit (subsidized)

Aggregate Loan Limit (subsidized)

First Year (Independent)

$9,500 $9,500 $3,500 $3,500

First Year (Dependent)

$5,500 $5,500 $3,500 $3,500

Second Year (Independent)

$10,500 $20,000 $4,500 $8,000

Second Year (Dependent)

$6,500 $13,000 $4,500 $8,000

Third Year & beyond (Independent)

$12,500 $32,500 $5,500 $13,500

Third Year & beyond (Dependent)

$7,500 $20,500 $5,500 $13,500

Lifetime limit (Independent)

$57,500 $23,000

Lifetime limit (Dependent)

$31,000 $23,000

Graduate & Professional students

$138,500 (includes undergraduate federal loans) $20,500

Note: Loan limits accurate as of Jan. 2022

Federal student loan repayment: When do you have to start paying back?

After you graduate, or drop below half-time enrollment, you must start paying the government back for your loans. Typically, federal loans allow a six-month grace period after you leave school before you have to start making monthly payments. 

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.

Get in touch with your student loan servicer to find out more about your loan repayment plans and other repayment options.

How do you apply for a federal student loan?

You apply for a subsidized or unsubsidized federal student loan the same way: 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 financial aid offices of 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. 

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 periods.

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

Other ways to pay for school

If you’re not able to fully fund your education through grants, scholarships, and federal loans, you may need to investigate private student loans. Check out our picks for the best private student loan deals for the coming school year. 

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