What is the difference between subsidized and unsubsidized loans? The main difference between subsidized and unsubsidized loans is that you don’t accrue interest during enrollment on subsidized loans. However, eligibility for each type of loan varies as well.
There are some key differences between federal Direct subsidized and federal Direct unsubsidized loans, including:
Who is eligible
What is better, subsidized or unsubsidized loans? Subsidized loans are better than unsubsidized loans because you don’t have to pay for any interest that accrues during your enrollment plus the 6-month grace period after finishing.
However, you can borrow more money with unsubsidized loans.
How loan interest accrues is the most significant difference between subsidized and unsubsidized student loans.
For subsidized loans, the federal government pays the accrued interest while you’re enrolled in school, plus during a 6-month grace period after you are not enrolled. This grace period applies whether you graduated or left. Also, interest does not accrue during periods of deferment.
From the student’s perspective, no interest accrues during your enrollment period plus the six-month grace period.
For unsubsidized loans, interest accrues on your loan during periods of enrollment, deferment, and forbearance. There is no grace period of interest accrual. However, you may choose not to pay the interest during your enrollment plus a six-month grace period.
If you do not pay the interest on an unsubsidized loan while you’re in school, that unpaid interest will be capitalized. This means the interest will be added to the principal amount, and then interest will accrue on that interest.
Who is eligible
Undergraduate students are eligible for both subsidized and unsubsidized loans. Graduate students are only eligible for unsubsidized loans issued at a higher interest rate than undergraduate loans.
What are the requirements for subsidized loans? The requirements for subsidized loans include the following:
One key requirement for subsidized loans is that students have to “demonstrate financial need.” There is no such requirement for unsubsidized loans.
To be eligible for both types of loans, you must maintain at least half-time enrollment in a school that participates in the Direct Loan Program (which is most accredited schools).
As of July 1, 2021, there is no maximum amount of time for which you can borrow subsidized student loans.
However, between 2013 and 2021, you could only take out subsidized loans for 150% of your degree program’s published length. For example, if you were enrolled in a 4-year program in 2018, you could only take out subsidized loans for 6 years (4 years x 150%).
After that period, you could still take out unsubsidized loans. For new borrowers, of course, this is now a moot point.
Interest rates are generally the same between subsidized and unsubsidized student loans.
However, the interest rate on subsidized loans is effectively 0% while enrolled, plus the six-month grace period. Technically speaking, the interest is accruing, but the U.S. Department of Education is paying it.
Loan borrowers can take out different loan amounts depending if the loan is subsidized or unsubsidized. This is the second most prominent difference between the two types of federal higher education loans.
The total loan amount that you can borrow in federal student loans (subsidized and unsubsidized) depends on 2 factors:
Being “dependent” means that your parent or guardian claims you on their taxes as a dependent.
If you are a dependent student, but your parents cannot take out a Parent PLUS loan (also called Direct PLUS loan), you are considered an independent student.
If you are a graduate or professional degree student, you are considered an independent student.
Here’s how much a dependent undergraduate student can borrow each school year:
First-year students can borrow $5,500. Only $3,500 of that can be subsidized loans due to annual loan limits.
Second-year students can borrow $6,500. Only $4,500 of that can be subsidized loans.
In your third year and beyond, students can borrow $7,500/year. Only $5,500/year of that can be subsidized loans.
Altogether, dependent students can borrow up to a $31,000 aggregate loan limit throughout their student careers. Only $23,000 of that can be subsidized.
Here’s how much an independent student can borrow each school year:
First-year students can borrow $9,500. Only $3,500 can be subsidized loans.
Second-year students can borrow $10,500. Only $4,500 can be subsidized loans.
In your third year and beyond, students can borrow $12,500/year. Only $5,500/year of that can be subsidized loans.
Graduate and professional students can borrow $20,500 in unsubsidized loans. These students cannot receive subsidized loans as of 2012.
Altogether, independent undergraduate students can borrow up to $57,500 throughout their student careers. Only $23,000 of that can be subsidized.
Altogether, graduate and professional degree students can borrow up to a $138,500 loan limit. Only $65,500 of that amount can be subsidized. These amounts include all loans from the graduate student’s time as an undergraduate.
Both subsidized and unsubsidized student loans have a loan fee. This origination fee for new loans is currently 1.057%, which is deducted from each loan disbursement.
The interest accrued during enrollment for unsubsidized loans may be seen as a fee, but it is not called by that term.
Student loan repayment for both subsidized and unsubsidized loans must begin by the time the 6-month grace period ends after enrollment ceases.
However, unsubsidized loans accrue interest during enrollment (unlike subsidized loans). So, it is often wise to start repayment on unsubsidized loans as soon as possible to avoid interest capitalization. When interest capitalizes, new interest builds on the old interest.
Either way, your lender will contact you during the six-month grace period after you drop below half-time enrollment, letting you know how much you owe in loan payments, as well as your first due date.
Both subsidized and unsubsidized loans are eligible for all federal repayment plans, including IBR, PAYE, and REPAYE.
Do you have to pay back a subsidized loan? Yes, you have to pay back a subsidized loan. It’s still a loan. The “subsidized” part refers to the federal government paying the interest that accrues during your enrollment period plus the six-month grace period.