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.
Key Takeaways
A subsidized student loan is available only to undergraduates with financial need, and the Department of Education pays the interest for a certain period of time.
An unsubsidized student loan is available to graduate and undergraduate borrowers, and interest is paid by the borrower.
Deciding between a subsidized vs. unsubsidized student loan depends on your financial situation and whether you qualify for a subsidized loan.
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.
General Qualifications
To get a subsidized student loan, you must be an undergraduate student. These types of loans are not available to graduate or vocational course takers.
Interest
With a subsidized loan, the U.S. Department of Education will pay for your interest while you’re at school, after you graduate for the first six months and if there is a period deferment.
Loan Limit
There is a cap to how much you can borrow with a subsidized student loan, which changes based on what year you are in school. The cap is $3,500 per year when you are a freshman, $4,500 for your second year and $7,500 for your third year and beyond in subsidized loans.
Eligible Borrowers
Only students who are undergraduates and who can demonstrate financial need qualify for a subsidized loan. Applicants who cannot demonstrate financial need must obtain an unsubsidized loan.
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.
Pros & Cons of a Subsidized Student Loan
- Deferred interest while you are enrolled in school
- Six month grace period after graduation with no interest
- Flexible repayment options, such as income-driven repayment plans
- You can defer or postpone payment if needed
- Lower interest rate than loans offered by private lenders
- Only available for undergraduates
- Requires a demonstration of financial need
- Has a cap on how much you can borrow, and varies based on your year
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.
General Qualifications
To get an unsubsidized student loan, you must be an undergraduate, graduate or professional student and be enrolled at least half time at a Direct Loan-eligible school.
Interest
The interest for an unsubsidized student loan is 4.99% for undergraduate borrowers and 6.54% for graduate or professional borrowers.
Loan Limit
Unsubsidized student loans have varying limits based on what year you are in school when you borrow funds, whether you’re a graduate or undergraduate and whether you are dependent or independent.
Eligible Borrowers
Only graduate and undergraduate students who are enrolled at least half time can take out an unsubsidized student loan. There is no need for borrowers to demonstrate financial need.
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.
Pros & Cons of an Unsubsidized Student Loan
- Lower interest than private student loans
- Available to both graduate and undergraduate students
- Higher borrowing limits than subsidized student loans
- Does not require a co-signer
- Has flexible repayment plans
- Not available to students who are enrolled less than half-time
- Begins accruing interest while you are in school
- The principal balance is increased by capitalized interest
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.
sources
- Federal Student Aid. "Receiving Financial Aid." Accessed January 19, 2023.
- Federal Student Aid. "Student Loan Forgiveness." Accessed January 19, 2023.
- Federal Student Aid. "Subsidized and Unsubsidized Student Loans." Accessed January 18, 2023.
- Federal Student Aid. "Student Loan Forgiveness." Accessed March 12, 2023.
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