Subsidized vs. Unsubsidized Loans for Students

Are you considering federal student loans to pay for your education? It would be best to start by filling out the Free Application for Federal Student Aid (FAFSA®) through the Federal Student Aid website. Once you submit your application, you’ll see which federal student loans you qualify for, how much money you can expect to receive, and what your funding gap may be. 

You may encounter unfamiliar words and complicated loan names, such as subsidized and unsubsidized student loans. This blog will define subsidized vs. unsubsidized student loans and explain their main differences. 

 

What is a Subsidized Loan?

A subsidized loan is a type of federal student loan available to undergraduate students with financial need. With this loan, the government pays the interest on your behalf while you’re in school at least half-time, for the first six months after you leave school, and during a deferment period. Since you don’t accrue interest during this time, the overall cost of the loan is reduced.  

Eligibility Requirements for Subsidized Loans

Subsidized loans are only available to undergraduate students with financial need. Your FAFSA information will determine whether you qualify for a subsidized loan, so submit your FAFSA before the June 30th deadline to check your eligibility. 

You’ll also need to be a U.S. citizen or eligible non-citizen, have a valid Social Security number, and not be in default of any other federal student loans. 

How Interest Works for Subsidized Loans

Interest on subsidized loans does not accrue while you’re still attending school as a half-time or full-time student. It also won’t accrue if you defer your loan due to financial hardship. The government pays the interest as it adds up during these periods, which means you pay less overall. 

Pros and Cons

Pros of subsidized loans:  

• You don’t have to worry about accruing interest while you’re in school. 
• The cost of subsidized loans is lower than unsubsidized loans overall due to not accruing interest over certain periods discussed above. 

Cons of subsidized loans:  

• You must meet certain criteria to qualify, which means not everyone is eligible. 
• Borrowing limits for subsidized loans are lower relative to unsubsidized loans, so you may need more money to cover all your school costs. 

 

What is an Unsubsidized Loan?

An unsubsidized loan is another type of federal loan available to undergraduate and graduate students. Unlike subsidized loans, with unsubsidized loans, you don’t get any help on the interest. You can still defer payments until you finish school; however, interest will continue to accrue over the deferment period.  

Eligibility Requirements for Unsubsidized Loans

With unsubsidized loans, students don’t need to demonstrate financial need (but they still need to complete the FAFSA). Otherwise, most of the requirements remain the same, including: 

• You must be a U.S. citizen or have eligible non-citizenship 
• You must have a valid Social Security number  
• You must not be in default on other federal student loans 

How Interest Works for Unsubsidized Loans

Interest begins to accrue on unsubsidized loans as soon as funds are disbursed to your school, and you’ll be responsible for paying back the principal (or amount borrowed) plus interest when your payments start. Even if you pause payments until after you leave school, you can make a payment at any time to chip away at your overall loan amount. 

Another thing to note is that the interest rate on unsubsidized loans is usually higher than on subsidized loans. Evaluate your options and understand the responsibility of taking on either loan option. 

Pros and Cons

Pros of unsubsidized loans: 

• There are no need-based requirements for students. 
• Unsubsidized loans have higher borrowing limits, so you can get more money to cover your education expenses. 

Con of unsubsidized loans:  

• Unsubsidized accrue interest when you’re still in school, which you will need to pay back. 
• There is a higher total cost with this type of loan. 

 

The Difference Between Subsidized vs. Unsubsidized Student Loans

A few key differences between subsidized and unsubsidized student loans include interest rates, eligibility requirements, loan limits, and repayment options. Understanding your options is critical, especially if you’re considering federal vs. private student loans. 

Interest Rates

The most significant differences between subsidized vs. unsubsidized loans are interest payments and interest accrual. 

Subsidized loans only accrue interest once you graduate or leave school, plus the first six months after (also known as the grace period). As long as you’re attending school at least half-time or have deferred payments, you won’t have to worry about interest until your payments kick in. Instead, the U.S. Department of Education will cover interest payments until six months after you leave school. 

Unsubsidized loans start to accrue interest right away. After funds are disbursed to your school, interest will begin to add up during in-school, deferment, and any grace periods.  

The government doesn’t cover any interest on an unsubsidized loan, and you must pay off all the accumulated interest. 

Eligibility

If you’re curious about how to qualify for student loans, remember that subsidized loans are only available to undergraduates with financial need. Graduate or undergraduate students can get unsubsidized loans, and there is no financial need requirement. 

If you’re applying for a federal student loan, complete the FAFSA first. 

Loan Limits

Subsidized loans have lower loan limits, while unsubsidized loans have higher ones. 

Your school will determine the amount you may borrow with a federal subsidized or unsubsidized loan. Just remember that the amount won’t exceed what you need for school.  

Another thing that’s good to know is that federal loans have annual and aggregate loan limits. These refer to how much you receive per academic year and how much you can borrow for undergraduate or graduate programs. The amount you’re eligible for each year might be lower than the annual loan limit based on your year in school and if you’re an independent or dependent student. 

For example (as of 2023), a first-year, dependent undergraduate student has an annual loan limit of $5,500 (in which no more than $3,500 may be in subsidized loans), while a similar student with independent status has a loan limit of $9,500. Graduate students may receive an annual federal loan limit of $20,500. 

Here are aggregate loan limits based on student type: 

• Dependent undergraduate student: $31,000 
• Independent undergraduate student: $57,500 
• Professional or graduate student: $138,500 

You may explore private college loans if you need more money after reaching your aggregate loan limits. 

Repayment Terms

For federal subsidized or unsubsidized loans, you’ll have a six-month grace period after you leave school before payments are due. Once it’s time to start paying, several repayment options are available. You’ll automatically be in the Standard Repayment Plan unless you ask to change your repayment option. 

Other repayment options for your federal loans include income-based repayment or graduated repayment. With income-based repayment, your payments will be 10-15% of your monthly discretionary income. Graduated repayment means your payments start lower and gradually get higher over time. 

The government offers other income-driven repayment plans for students who need more flexibility. If you have federal loans, remember you can update your repayment plans anytime for no additional charge, even before making payments. 

 

Unsubsidized vs. Subsidized Loans: What’s Right for Me?

While subsidized loans are generally less expensive in the long run, you may not be eligible for them if you don’t qualify or are going to graduate school. In that case, an unsubsidized loan may be more appropriate. 

Remember that both types of loans are debts, so you have to pay them back. Taking on too much debt at once can be a financial burden later. Consider your financial situation and ability to repay the loan before deciding. 

 

Learn More with Ascent

Be sure to explore all your financial aid alternatives before you apply for any type of loan, including grants and scholarships. If federal student loans can’t cover your college tuition, private student loans can help you close the gap.  

Ascent offers fixed or variable interest rate loans and flexible repayment options – with or without a cosigner. We also provide scholarship opportunities, free student resources, and financial planning tools to help students achieve their educational goals.   

Paying for college is a huge responsibility. Remember to do plenty of research and explore each option available to you to make the right decision. 

 

Frequently Asked Questions

Here are some questions people commonly ask when considering subsidized vs. unsubsidized loans. 

Do you Pay Back Subsidized Loans?

Most students will pay back their subsidized loans after graduation, but you can make a payment and pay them back as soon as you want. However, you must start making payments six months after you graduate or leave school. As soon as you enter this repayment phase, you’ll want to choose a plan that makes sense. Remember, you can always change your payment plan if you need to by contacting your loan servicer. 

Do You Have to Pay Unsubsidized Student Loans While in School?

No, payments are not necessary for federal unsubsidized loans while in school. You can pause payments for unsubsidized student loans until six months after graduation. However, there’s no penalty for making a payment or paying off your loan before then (if you can afford to). Interest will start to accrue as soon as you get the loan. 

Do Unsubsidized Student Loans Affect Credit Scores?

Unsubsidized federal student loans don’t require a hard inquiry into your credit score or a good credit score. Student loans impact your credit score as installment debts (like car loans) and show up on your credit history as soon as funds are disbursed. They can help your credit by increasing your account history and credit mix, but they can also hurt your credit score if you have high debt or missed payments.