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Subsidized And Unsubsidized Federal Student Loans: What’s The Difference?

Dan Rafter5-minute read
UPDATED: March 28, 2022

Like many students working through college, you need to borrow money to pay for your tuition, room and board, books and other supplies. You have several loan choices, ranging from federal student loans provided by the federal government to student loans offered by private lenders.

Loans offered by the federal government tend to come with lower interest rates and better terms. Most students focus on obtaining these loans first, only turning to private loans after exhausting their federal options.

The tricky part is that federal student loans come in two main flavors: direct subsidized and direct unsubsidized loans. And while these loans are both offered by the U.S. federal government, they’re not quite the same.

It's a bit complicated, but direct subsidized student loans are generally regarded as the best student loan you can get. The terms that come with direct unsubsidized student loans aren't quite as good. But these loans still tend to come with lower interest rates than do private student loans.

Of course, the best way to qualify for the lowest interest rates – on both federal and private student loans – is to build a strong credit score. Visit Rocket HQSM to find out how to do this.

Here’s a cheat sheet explaining the differences between these two federal student loans, who can qualify for them and how the repayment process for each works.

How Does A Subsidized Loan Work?

According to the U.S. Department of Education, direct subsidized loans are available to undergraduate students who can demonstrate a financial need. Your school will determine how much you can borrow, but this amount can't exceed your financial need.

The main benefit of this loan is that the Department of Education will pay the interest on it while you're in school at least half-time and for the first 6 months after you leave school. If your loan payments are deferred, the department will again pay the interest on these loans during this deferment period.

After you graduate and begin paying back your subsidized loan, you’ll have to pay interest, of course, according to the interest rate assigned to your loan.

"Subsidized loans are superior because the government pays the interest that accrues while the student is in school and in periods of deferment," said Teddy Nykiel, marketing director for Downers Grove, Illinois-based "Students with subsidized loans won't see their balances increase during their college years. Students with unsubsidized loans will."

What’s An Unsubsidized Student Loan?

The Department of Education says that direct unsubsidized student loans are available to all undergraduate and graduate students, regardless of financial need. Your school will determine how much you can borrow based on how much it costs you to attend school and on any other financial aid you receive.

The biggest drawback is that you pay the interest on an unsubsidized loan at all times. If you choose not to pay the interest while you’re in school or during grace periods, your interest will accrue and be added to the principal amount of your loan.

Chayim Kessler, a certified public accountant and owner of Miami Beach CPA, said that both subsidized and unsubsidized student loans have their place.

"Subsidized loans are great for incoming undergraduate freshman who cannot meet school costs," Kessler said. "Unsubsidized loans, on the other hand, are ideal for those who cannot demonstrate their financial need and those planning to get into graduate school."

There are drawbacks to each loan type, too, Kessler said. Subsidized loans, for instance, are only available to undergraduate students and not to grad students. Unsubsidized loans, while open to all students, are more expensive. The interest on these loans starts to accrue once the loan is disbursed to your school. This differs from subsidized loans, where the government pays the interest on your loans.

Do You Have To Pay Back Unsubsidized Loans?

You’ll have to pay back both unsubsidized and subsidized federal student loans. When you start paying them back depends on your status as a student. If you graduate, you have a 6-month grace period before you must start making monthly payments on your federal student loans.

That same grace period kicks in if you leave school without graduating or drop below halftime enrollment, according to the U.S. Department of Education.

Payments are usually due once a month. Your loan servicer will send you information about when you must start paying back your loans and how much you need to pay each month.

How Much Can You Get In Subsidized And Unsubsidized Loans?

Your school will determine how much you can borrow in unsubsidized and subsidized student loans. But the Department of Education also sets limits on how much you can borrow each year.

If you’re a dependent student – meaning that you rely on your parents for financial assistance – you can borrow a maximum of $5,500 during your first year as an undergraduate student. No more than $3,500 of this can be in the form of subsidized loans.

This amount increases each year. As a second-year undergraduate, you can borrow a total of $6,500, with no more than $4,500 coming from subsidized loans. As a third-year undergraduate student or beyond, you can borrow up to $7,500 a year, with a maximum of $5,500 coming in the form of subsidized loans.

Undergraduate dependent students can borrow a total of $31,000 in federal student loans during their college careers, with no more than $23,000 of this amount coming from subsidized loans.

The numbers are different for students who are considered independent, meaning that they are no longer reliant on financial assistance from their parents.

Independent undergrads can borrow $9,500 in their first year of college in the form of federal student loans, with no more than $3,500 of this amount as subsidized loans. In their second year, independent undergraduate students can borrow a total of $10,500, with no more than $4,500 coming from subsidized loans. In their third year and beyond, independent undergraduate students can borrow $12,500 a year, with a maximum of $5,500 coming from subsidized loans.

Independent graduate students – the U.S. Department of Education considers all grad students to be independent – can borrow $20,500 a year in federal student loans. These loans must be unsubsidized, though. Graduate students are not eligible for subsidized federal student loans.

Independent undergraduate students can borrow a total of $57,500 in federal student loans, with no more than $23,000 of this amount coming from subsidized loans. Graduate students can borrow a total of $138,500 in federal student loans.

The world of student loans can be a confusing one. But financial experts do give one piece of advice: If you qualify for a subsidized federal loan and you must borrow money, that loan type is the best choice.

"If students are eligible for subsidized loans, they should always consider taking those first," said Steven Byrd, a financial coach with Greenville, South Carolina-based Hearthstone Financial Coaching. "Only if they need additional resources to pay for school should they take out unsubsidized loans. However, unsubsidized loans are still generally a better option for most people than private student loans."

Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, and