Student loans 21 February 2023

The Difference Between Subsidized and Unsubsidized Loans

Subsidized and unsubsidized loans are flexible and cater to the needs of all students. Keep reading to learn what differentiates the two to help you make the best decision for your financial needs.

What’s the Difference Between Subsidized and Unsubsidized Loans?

Federal student loans, otherwise referred to as federal Stafford loans, place you in a position where you are obligated to pay back the government for the loan when you are able to. Subsidized and unsubsidized loans are just two types of federal student loans available, and are excellent options for paying for your college education in addition to other related costs such as living expenses. Having said that, it’s essential to understand the differences between them. In this guide, we will equip you with information to help you confidently choose whether a subsidized or unsubsidized loan best fits your unique needs.

What are Subsidized Student Loans?

Subsidized loans are for undergraduate students and do not accrue interest while you are in school or during the grace period. In order to be eligible for this loan, you’re required to demonstrate financial need. Once you’ve satisfied the necessary criteria, your loan limit is calculated by deducting your family contribution and other financial aid from your tuition, as well as other college-related expenses.

Subsidized student loans are essential because while you are studying, even as a part-time student, the government is responsible for the interest on your loan. This means that when you start repaying the loan, you will pay thousands of dollars less than you would have if the loan had accrued interest.

What are Unsubsidized Student Loans?

Unsubsidized loans, on the other hand, do not require you to prove financial need but the interest on the loan starts accruing as soon as the funds are transferred to your account. Available to undergraduate, graduate, or professional students, this type of loan is determined by deducting any financial aid that you might already be receiving, such as a scholarship, from the total cost of your degree. The interest on an unsubsidized loan is fixed and will be charged until the loan is paid back in full, even during the grace period.

Unsubsidized loans are necessary for certain students because they do not need a co-signer or credit history to get the loan successfully.

Subsidized vs Unsubsidized Student Loans

Here is a comparison of subsidized vs unsubsidized loans:

Who is eligible Undergraduate Undergraduate, graduate, or professional 
Current interest rate4.99% Undergraduate: 4.99%

Graduate/professional: 6.54%

Loan limit per year (Independent students)First year: $3,500
Second year: $4,500
Third year: $5,500
Fourth year onwards: $5,500
First year: $6,000
Second year: $6,000
Third year: $7,000
Fourth year onwards: $7,000
Loan limit per year (Dependent students)First year: $3,500
Second year: $4,500
Third year: $5,500
Fourth year onwards: $5,500
First year: $2,000
Second year: $2,000
Third year: $2,000
Fourth year onwards: $2,000
Loan fee1.057%1.057%
Repayment duration – Repayment begins
6 months after you cease
to be a student
– Total repayment in 10–25yrs
– Repayment begins
6 months after you cease
to be a student
– Total repayment in 10–25yrs

Which Loan is Best for You?

Choosing which loan you should get depends on your expected family contribution and other financial aid you have received. Remember that there are no FAFSA income limits in order to get funding. For example, suppose the total amount of your expected family contribution combined with other financial aid is more than the total cost of your getting a college education (Cost of Attendance). In that case, you do not qualify for a need-based subsidized loan but are eligible for an unsubsidized loan.

Subsidized loans are reserved for undergraduates, both full- and part-time students, who demonstrate financial need. Only a small number of students successfully establish financial need. This loan does not accrue interest while you are in school, and you’ll need to start paying it back as soon as your six-month grace period ends. Being aware of the federal student loan interest rate is also useful, seeing as it is the rate that will apply for the duration of your loan unless told otherwise.

On the other hand, unsubsidized loans are for undergraduates as well as FAFSA independent students  (graduates, and professional students). Although this loan doesn’t require financial need, the interest starts accruing as soon as the funds are disbursed so you won’t receive relief from the government.

Review your financial situation carefully when deciding between a subsidized and unsubsidized loan, as it is an important decision that can also influence the repayment option available to you.

How to Apply for Federal Student Loans

The application process for Federal Student Loans is simple. All you need to do is to apply for Free Application Federal Student Aid (FAFSA). The best part is that they are both free. Eligibility for federal student loans (the type of federal loan you qualify for) and whether or not you qualify for additional aid such as grants is determined by the FAFSA form. 

The FAFSA application is also available online and is processed within five days, while mailed applications take up to 10 days. Take note of when FAFSA closes so that you’re submitting your application on time. Two key things to remember: There is no processing fee for both applications and you must submit a FAFSA form every academic year.


Are unsubsidized loans worth it?

Unsubsidized loans may seem scary because of the accrued interest, but they can be beneficial. You have a much lower fixed interest rate and if you’re an independent student, you get a loan limit of up to $12,500 per year.

Do you pay back subsidized loans?

Yes. After you graduate, you have a six-month grace period. After it expires, then you have to start repaying the loan.

Can I pay off subsidized student loans early?

Yes. You can pay your subsidized loan as early as you wish with no penalties.

Final Thoughts

Federal loans make it possible for young people to afford a college education. Although subsidized and unsubsidized loans differ in terms and conditions, they both provide value that will minimize the stress you experience while in college. Loans can be a daunting thing, but equipping yourself with the correct information will help make getting a federal loan easier and more successful.