Updated December 13, 2017

Subsidized vs Unsubsidized Student Loans

Subsidized loans give you an interest break, but there are limitations. Unsubsidized loans allow you to borrow more, but you'll pay more interest. Find out what you qualify for.

What is the Difference between Subsidized and Unsubsidized?

Trying to understand the types of student loans can be confusing. There are two types of direct federal government loans: Direct Subsidized Loans and Direct Unsubsidized Loans. There are benefits and limits to each of them.

  • In the simplest forms, subsidized loans give you the borrower a loan interest break known as an interest subsidy, but there are limitations.

  • While, unsubsidized loans allow you to borrow more you will end up paying more interest. Remember, interest accrues daily on all student loans. Whether it is a few cents or a few dollars a day, do not forget about this large part of your loans.

Subsidized and Unsubsidized might sound like financial jargon, but it determines how much you will owe.

What if we told you that you could owe less if you have subsidized loans? Interested? Let's learn more here.

Did you know: Knowing your federal student loan servicer(s) or lender(s) while you're still in school helps you with interest.

Even paying only $5 or $20 a month towards your loans can greatly reduce your overall debt. That's a latte or a trip to the movies and can help you significantly. Learn more at National Student Loan Data System.

What Is a Subsidized Loan?

With a subsidized loan, you won't have to pay the interest that adds up while you attend school. Sounds like a dream come true, right? Hold on, it's still a loan and you'll still have to pay back what you borrow. It's not free money.

Are Subsidized Loans Good?: Yes, subsidized loans can be great. It's a loan that accrues no interest while you're in school, no interest for six months after graduation/separation from school, and has a fixed interest rate. But remember they are still loans and they are provided by the federal government. You will need to pay them back or expect the federal government to take action.

A Subsidized Loan (Sub) may also be referred to as a Subsidized Stafford Loan or a Federal Direct Subsidized Loan (and in certain instances may be referred to as a Perkins Loan). Don't let the different names fool you it's the same program.

Basically, the Department of Education provides the interest subsidy for financially needy students (we discuss who qualifies below). If you qualify, the Department of Education (DOE) pays your interest while you are in school. They may also pay it for the first six months following graduation.

Note: Be aware of your enrollment period.

This is the time that loan servicers will document for periods of being in-school and at graduation or separation from the school. This will let them know when they can begin to send you monthly statements.

You could still take advantage of the subsidy if you need to defer your student loan payments. When you defer your loans, you stop making payments with the approval of the DOE. This is only temporary. A few reasons you may qualify for deferment include:

  • Unemployment
  • Underemployment
  • Economic hardship
  • Active military service

You don't automatically get to defer a loan, though. You must apply with your loan servicer. If you are having trouble paying your loan, contact them right away.

You can also login to your federal loan servicer website and from there find the necessary tab pertaining to temporary repayment options. You can fill the form out and submit it online. Or you can download the Deferment form here.

If you qualify for deferment, the DOE will cover the interest that accrues during that time. Not everyone qualifies for subsidized loans. Read on to see if you are one of them.

Who Qualifies for Subsidized Loans?

Qualification for subsidized loans is done when you apply for aid through FAFSA. The Free Application for Federal Student Aid shows the government your financial situation. This includes your parents' income. The government uses this information to determine what they call your "demonstrated financial need."

Dependent versus Independent Students: When you begin the process for financial aid and fill out the FAFSA your dependency status will determine your financial need.

If you are a student that is under 24 years old and have no dependents of your own, you are considered a dependent student. Even if you are living on your own and have been supporting yourself for years the above qualifies you as a dependent. On the other hand, if you are a student above 24, have a dependent of your own, have been adopted, or considered homeless you will qualify as an independent student.

To calculate this need, the government must know a few other factors:

  • Cost of attendance (COA): This is the total cost for you to attend your chosen school. It includes tuition, room/board, books, supplies, transportation, daily living expenses, and any dependent care.

  • Expected family contribution (EFC): This is based on your family's ability to contribute to your college expenses. It is based on their income, assets, and benefits. (This is a standard percentage of your parents' total income and assets.)

  • Amount of any other financial aid: Any other monetary awards you received figure into the "demonstrated financial need" equation.

Demonstrated Financial Need Equation

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COA - EFC - any other financial aid = Demonstrated Financial Need

You can't receive more than this number in subsidized loans. But there is an annual maximum you may receive as well. You can't receive more than the lesser of the two numbers. We discuss these maximums below.

Any amount beyond what you receive is considered non-need based aid. This means you received the aid necessary to help you get to college. Now you still may qualify for unsubsidized loans as well as private loans. We talk about these below.

How Long Are You Eligible for Subsidized Loans?

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No matter how much you love school and want to continue, you can't receive subsidized loans forever. Any subsidized student loans disbursed after July 1, 2013 have deadlines. This differs from unsubsidized loans, though.

To figure the maximum amount of time you can have subsidized loans, you must know the length of your chosen program. This isn't the time you take to complete it. It's the published length according to your school. Not sure what the published length is for your program? Check your school's catalog or ask your counselor.

Let's look at an example:

You enter your school's 4-year program for your area of study. You have up to 6 years or 150% of the published time to complete the course. If you don't finish within that time, you may still get other loans. You won't be eligible for any more subsidized loans, though.

There's a catch! If you change programs, you are only eligible for the allotted time for that program. It could be longer or shorter. No matter the change, the time you already used up counts towards the new program.

How Much Can You Borrow with a Subsidized Loan?

Along with the published length of the program, there is a maximum amount you may borrow. You may or may not be eligible for the full amount. It depends on your financial situation, as we discussed above.

In general, the following limits apply for direct subsidized loans for undergraduates only:

  • 1st year - $3,500
  • 2nd year - $4,500
  • 3rd year - $5,500
  • 4th year - $5,500

Keep in mind: Only undergraduate students are eligible for subsidized loans. Once you have graduated and decide to return to college or a career school that accepts federal aid the only options are unsubsidized loans, Plus loans and private loans.

What Are the Loan Fees?

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Every direct student loan disbursed incurs a fee.

Whether you get a subsidized or unsubsidized loan, you pay the same amount. It is a percentage of your loan amount. The amount you pay depends on the disbursement date of your loan. The difference is negligible, though.

  • Loans disbursed on/after October 1, 2014 but before October 1, 2015 - 1.073%
  • Loans disbursed on/after October 1, 2015 but before October 1, 2016 - 1.068%
  • Loans disbursed on/after October 1, 2016 but before October 1, 2017 - 1.069%

The appropriate fee is deducted from your loan disbursement.

Did you know: The loan disbursement is the money paid to you or your school for college costs. With a direct loan, either subsidized or unsubsidized, your school account is funded first. Once your necessary school costs are covered, the remaining funds come to you. Don't overborrow though, remember interest will accrue on all loans.

When Do You Start Paying on Subsidized Loans?

Subsidized loans are among those that have a small grace period following graduation. The first six months are payment free, also interest free. The DOE continues to subsidize your loan for the grace period. After that, you start paying.

If you do nothing, you enter what's called the standard repayment period. This is a 10-year term. You pay principal and interest during this time.

Here's an example:

  • Loan amount: $20,000
  • Interest rate: 5%
  • Estimated monthly payment: $212.13*

*This doesn't include loan fees

For a new graduate, this could eat up a large amount of their monthly salary. Add in rent, groceries, transportation, and daily living expenses, and you could be in trouble.

Can't make the payments? Don't worry. Contact your loan servicer and discuss your loan repayment options. For more information on your options, read how to get student loans forgiven.

Good news! If you are not able to make payments on your federal student loans you can apply for a forbearance. A forbearance is valid for up to 12 months at a time and will help with any type of financial difficulties.

Who Doesn't Qualify for Subsidized Loans?

We talked about demonstrated financial need. It's simple. If your EFC exceeds the cost of attendance, you don't have a need. It gets more complicated, though. Even if you have a need, you may not qualify. Here's who falls into that category:

  • You are a graduate student
  • You don't attend school at least half-time
  • You aren't in a program that leads to a degree or certificate

Good news! Even if you don't qualify for subsidized loans, you can still get unsubsidized loans. Learn more about them below.

The Downside of Subsidized Loans

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Subsidized loans sound amazing. No interest for at least a few years? How could you resist? Of course, there are some downsides.

The first of which is that it's a loan you must repay. You have options on how you pay it, though. We discuss them further below. Other downsides are:

  • Not everyone is eligible
  • You probably can't cover your entire cost of education
  • If your parents earn too much, you may not qualify whether they contribute or not

Are subsidized loans interest free? No. Subsidized loans will accrue interest after the interest subsidy for your loans ends.

This occurs after you have graduated or have been separated from school and your 6-month grace period ends.

Not eligible for a subsidized loan? Don't worry, you still have options. We discuss them below.

Did you know: The federal government provides undergraduate and graduate students student loans through the William D. Ford Federal Direct Loan Program.

What Are Unsubsidized Loans?

If you reach your subsidized loan maximum or are ineligible, you have options. You can still get unsubsidized loans.

In general, the following limits apply for direct unsubsidized loans for undergraduates only:

1st year$5,500$9,500
2nd year$6,500$10,500
3rd year and beyond$7,500$12,500
MaximumIn total $31,000 with no more than $23,000 in subsidized loans In total $57,500 with no more than $23,000 in subsidized loans

These above numbers equal your aggregate loan limit. The amount of which you can borrow of both Unsubsidized and Subsidized loans and any previous loans under the Federal Family Education Loan (FFEL) Program.

Direct unsubsidized loans offer low, fixed interest rates too. What they don't offer is the interest subsidy. In other words, you pay the interest yourself.

Are Unsubsidized Loans Bad?: No, Unsubsidized loans are great if you are no longer eligible for Subsidized loans. Unsubsidized loans help to cover the balance that grants, scholarships, and subsidized loans don't cover. But, paying any interest that you can before you enter repayment will help you reduce your repayment period.

Unsubsidized loans (Unsub) may also be referred to as Unsubsidized Stafford Loans or Federal Direct Unsubsidized Loan. Again, don't let the different names fool you as they are the same loan.

There's a catch here. With subsidized loans, you didn't have to worry about the accrued interest while you were in school. There was interest charged, but you didn't pay it. The government paid it for you. With unsubsidized loans, you don't have that benefit. You pay the interest.

You have two options: pay the interest while you are in school or let it accrue.

If you let the interest accrue, it capitalizes. We look at what this means below.

Capitalizing Interest - What Does That Mean?

Capitalizing interest sounds scary. It's not. Actually, it helps you. It means you don't owe the accrued interest all at once. Instead, the accrued interest is tacked onto your principal balance. You still owe it, but you can take longer paying it back.

How you pay back the principal and interest depends on your current situation. If you can afford the standard repayment plan, your loan will be paid off in 10 years. If you can't, don't worry. There are options. The amount of your income determines how much you pay. Your loan servicer can extend your term based on what you can afford now. The amount you pay may adjust as your income increases.

Understand, though, this increases the amount of interest you pay. The longer you borrow money, the more interest it costs you.

How Unsubsidized Loans Are Different

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Subsidized and unsubsidized loans have many similarities. Their interest rate, time you can borrow money, and loan fees are similar. There are some differences that may work to your advantage, though:

  • You can be a graduate student and obtain unsubsidized loans
  • You don't have to prove your financial neediness to obtain the loan
  • You may be able to borrow more

Keep in mind graduate students are no longer eligible for subsidized loans. Once you have graduated you will have met the maximum eligibility period offered for subsidized loans leaving only Unsubsidized, PLUS and private loans.

What happens when you maximize your unsubsidized loans? You still have options. Some students turn to private loans.

Private Loans for College Students

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Private loans might not sound glamorous. You don't get any subsidies. But you may get more attractive interest rates. If you maxed out your direct loans, you may run into some higher interest rates. Don't discount the benefits of private loans.

Private loans help pick up the slack when you don't get enough from your financial aid. Private loans also often offer different repayment options.

With private loans, you can shop around. See what programs different banks offer. Some may offer benefits that exceed what you could get from the government. You won't know until you ask.

Even if you are eligible and take direct subsidized and unsubsidized loans an option in the future is to refinance your federal loans to a private company for a lower interest rate and savings, read our article "Best Student Loan Refinance."

Keep in mind having a credit worthy cosigner can help you to get a better interest rate if you do need to get a private student loan. As a borrower, your cosigner will also become responsible for the student loans that you take out. Under some refinance options you can have a cosigner released after as few as 12 consecutive payments.

Bottom Line

Many college students fund their college education with a combination of government and private loans. Only you know what works for you. We suggest looking at all your options first. Then you can narrow down what is right for you.

Keep in mind the benefits government loans offer. From loan forgiveness to repayment plans, you have many benefits at your disposal. Exhaust your government-sponsored options and then see what else is available to you.

More from CreditDonkey:

How to Get Rid of Student Loans

Student Loan Forgiveness Scams

Should I Consolidate Student Loans

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Student Loan Forgiveness

Student loan debt weighing you down? You may be eligible for student loan forgiveness. Read on to see how you can qualify and other ways to reduce your debt.

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