Federal student loans

Subsidized vs. Unsubsidized Student Loans: Key Differences

subsidized vs unsubsidized loans

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What’s the difference between unsubsidized and subsidized student loans? Well, the government covers the interest that accrues on subsidized student loans during periods of deferment. But it doesn’t typically help with interest charges on unsubsidized loans. Read on for a comparison of subsidized vs. unsubsidized loans so you understand how they’re different (and how they’re the same).

Subsidized vs. unsubsidized loans: What’s the difference?

Subsidized student loans can be more affordable than unsubsidized ones, since the government covers interest during your grace period and other periods of deferment. Unsubsidized loans, on the other hand, collect interest from day one.

So if you took out a $10,000 unsubsidized loan at the beginning of college, you could be facing a bigger balance after you graduate. Subsidized loans are clearly preferable, but not everyone will qualify.

Only students with financial need are offered subsidized loans. Plus, these loans have lower borrowing limits than unsubsidized loans. Because of this, you might need to take out both loan types to pay for school.

This chart summarizes the main differences between subsidized and unsubsidized Direct loans for college and graduate students.

Subsidized loansUnsubsidized loans
Government covers interest during a period of deferment?YesNo (the government may partially cover unpaid interest on certain income-driven repayment plans)
Based on financial need?YesNo
Available for undergraduate and graduate students?Not usually. Direct subsidized loans are only for undergraduates.

Subsidized Health Professions Student Loans may be available for graduate students with exceptional financial need. Perkins loans used to be available for graduate students, but are no longer offered.
Borrowing limitsUp to $23,000 total for dependent undergraduate studentsUp to $31,000 total for dependent undergraduate students
Up to $57,500 for independent undergraduates
Up to $138,500 for graduate students
Interest rate on Direct loans2.75% for 2020-21 year2.75% for undergraduates
4.3% for graduate students
Direct PLUS loans will have a rate of 5.3%
Origination fee on Direct loans1.059% on or after Oct. 1, 2019 and before Oct. 1, 20201.059% on or after Oct. 1, 2019 and before Oct. 1, 2020
4.236% on PLUS loans
Eligible for federal repayment plans and protections?YesYes
How to applySubmit the FAFSASubmit the FAFSA

How subsidized student loans work

Subsidized student loans are probably the best loan Federal Student Aid has to offer because of their interest subsidy. While you’re in school and for six months after you graduate, you don’t have to worry about any interest accruing on these loans.

And if you ever put your loans into deferment to postpone payments (perhaps because you go back to graduate school), interest won’t add up on your loans then, either. Once the deferment ends, though, your loans will accrue interest at the normal rate.

While subsidized loans have the best terms, they’re unfortunately not available to everyone. Federal Student Aid only offers them to students with demonstrated financial need. If you don’t get offered a subsidized loan in your financial aid award letter, you’re out of luck.

Plus, these loans have borrowing limits. This means you might not be able to cover your college costs solely with a subsidized loan. That’s where an unsubsidized loan can fill the gap.

How unsubsidized student loans work

Unsubsidized loans are available to any U.S. citizen or eligible non-citizen enrolled in an approved program. You don’t need to show financial need to qualify, nor do you need to have a cosigner (as you probably would for a private student loan).

While unsubsidized loans are much more widely available to students, they don’t have any interest benefits. Instead, they start accruing interest from day one.

If you borrowed a $40,000 unsubsidized loan at a 2.75% rate, for instance, you could end up with interest charges of $2,286 over four years. Once your grace period ends, that interest will get added on to your original amount, making your balance bigger than it was when you borrowed.

While no one is a fan of student loan interest, here’s one silver lining: Interest rates are hitting an all-time low in 2020-21 at 2.75% for undergraduates and 4.3% for graduate students. If you’ve already borrowed, you won’t get to take advantage of this rate drop.

But if you’re a new borrower, enjoy the fact that you’re getting some of the lowest interest rates on student loans ever.

Consider making in-school payments on unsubsidized loans

Since unsubsidized loans, such as Direct loans and PLUS loans, accrue interest from the date they’re disbursed, they can get pretty expensive over the years.

If you can swing it, you can cut down on costs by making in-school payments. You don’t necessarily need to make full payments, but just enough to cover the interest from month to month.

Even if you can throw $25 per month at your loan, you could prevent it from ballooning. While it’s tempting to ignore your student loans completely while you’re a student, making small in-school payments could make a big difference for Future You.

How to qualify for federal student loans

As mentioned, subsidized and unsubsidized student loans have one big difference when it comes to eligibility requirements: financial need. Subsidized student loans are need-based, whereas unsubsidized ones are not.

Other than that, however, these loans share similar qualifying criteria. You must,

  • Be enrolled at least half-time at a school that participates in the Direct Loan program
  • Be a U.S. citizen or eligible non-citizen
  • Have a Social Security number
  • Maintain satisfactory academic progress while you’re in school
  • Have earned a high school diploma or its equivalent
  • Be registered with the Selective Service (for males between 18 and 25)

You also can’t be in default on any existing federal student loans, as this will take away your eligibility for additional financial aid.

To access these loans, you need to fill out and submit the Free Application for Federal Student Aid (FAFSA).

Avoid borrowing more loans than you need

Once you’re accepted into college or graduate school, your school will send you a financial aid award letter detailing how much aid you can get, whether in the form of scholarships, grants, or student loans.

This letter will show how much you can borrow in subsidized and/or unsubsidized student loans. But it’s important to note that you’re not obligated to borrow the full amount (or any loans, for that matter).

In fact, it’s a good idea to reduce the amount you borrow so you’re not left with burdensome amount debt after you graduate. Some ways to reduce borrowing include,

  • Applying for scholarships
  • Working a part-time job during school
  • Choosing a school with low tuition costs

If, on the other hand, you’ve hit the borrowing limits for federal loans and need more money for school, you could consider a private student loan. But again, be careful about borrowing too much, and try to avoid high interest rates.

Remember, the less you borrow now, the less you’ll have to pay back after graduation. So use every strategy at your disposal to reduce the amount you need to borrow. That way, you can earn your valuable degree without going deeply into debt.

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