Subsidized vs. Unsubsidized Student Loans: What to Choose?

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Edited byAmy Wilder

Updated: March 16, 2023

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The difference between subsidized vs. unsubsidized student loans lies in how and when interest is charged and who can qualify for each loan type.

Subsidized student loans are only available to undergraduate students with financial need, and where the U.S. Department of Education pays for interest for a certain period. Conversely, unsubsidized student loan borrowers are always responsible for their interest and do not need to demonstrate financial need to qualify for the loan.

There are many ways to pay for college. Decide which loan suits your needs best by learning the differences between subsidized and unsubsidized student loans.


What Is a Subsidized Student Loan?

A subsidized student loan, formally known as a Direct Subsidized Loan, is offered by the U.S. Department of Education to undergraduate students with limited financial resources. To support students in need, the Department of Education pays the interest while you’re at school, for the first six months after graduation and during deferment.

The current APR for a subsidized student loan is 4.99% for undergraduates, depending on what year you are in and whether you are dependent or independent. Generally, the aggregate loan limit is $31,000, with no more than $23,000 for a subsidized loan.

To qualify for a subsidized student loan, you must be enrolled at least half-time in a school that participates in the Direct Loan program and be able to demonstrate the need for financial assistance.

Features of a Subsidized Student Loan

Like unsubsidized or private student loans, subsidized student loans come with their own set of features and requirements.


Pros & Cons of a Subsidized Student Loan

A subsidized student loan has advantages, like not having to pay interest while attending school. But it can have drawbacks, so it’s smart to learn how the loan works before deciding to take on debt.


What Is an Unsubsidized Student Loan?

An unsubsidized student loan, or a Direct Unsubsidized Loan, is another student loan available from the Department of Education. Unlike its subsidized counterpart, it’s available to graduate and undergraduate students and does not require demonstration of financial need. However, borrowers of an unsubsidized student loan are required to pay for their own accrued interest throughout the life of the loan.

The APR of unsubsidized student loans depends on whether you’re a graduate or undergraduate student. Undergraduate borrowers have an APR of 4.99%, while graduate borrowers have an APR of 6.54%. The overall limits on how much you can borrow for unsubsidized loans depend on your year in school, but the total limit is $31,000 for dependent undergraduate students, $57,000 for independent undergraduate students and $20,500 for independent graduate students.

Features of an Unsubsidized Student Loan

Unsubsidized student loans come with their own set of requirements, interest and loan limits. Understanding these features can help you decide if this is a good option.


Pros & Cons of an Unsubsidized Student Loan

An unsubsidized student loan is a low-interest option for financing your education, but it does have a few disadvantages.


Which Is Better: a Subsidized or Unsubsidized Student Loan?

When choosing between subsidized and unsubsidized student loans, the best option for you depends on your financial circumstances. However, compared to private student loans, both subsidized and unsubsidized loans are a better option, as they offer the lowest rates on the market.

You can ask yourself some questions to help you make a decision:

  • Do you have a financial need? Are you able to demonstrate it?
  • Why are you taking out the loan? Is it to pay for tuition or other educational expenses?
  • Do you meet the qualifications? Are you enrolled at least half-time?

You can determine which loan type is best for you using the questions above. For example, if you do not have financial need, you may only be able to choose an unsubsdized loan.

For most borrowers, a federal student loan is the best choice before applying for private student loans as they typically offer lower interest rates and more flexible payment terms.

FAQs About Subsidized & Unsubsidized Student Loan

Below we answer some questions you may have about subsidized and unsubsidized student loans.

Paying off unsubsidized loans should be your first priority, as they accrue interest while you are at school.

It depends on the terms you get, as you can get 10 to 25 years to repay the loan depending on your repayment plan.

If you do not need the funds from a subsidized loan, getting it may not be a good idea. However, getting a subsidized loan may help if you have fees and expenses, such as accommodation or books.

You can cancel all or part of your loan within 120 days of receiving it. If you do not cancel it, you will begin to accrue interest on those unused funds.

Student loans can be used for anything your school deems a necessary expense. This could include tuition or fees, school trips, accommodation, books, childcare costs and more.

Yes, if you meet certain conditions. Several types of student loan forgiveness, cancellation and discharge are available on the Federal Student Aid site.

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