Subsidized vs. Unsubsidized Student Loans: How To Choose the Right Option

Two of the main loans the Department of Education offers are Direct Subsidized Loans and Direct Unsubsidized Loans. As of the end of 2024, nearly 35 million borrowers held these loans.

To apply for either, you must complete the Free Application for Federal Student Aid (FAFSA). But before you take out any student loans, it's crucial that you understand how each works.

Here's what you need to know about subsidized vs. unsubsidized loans.

What are federal subsidized and unsubsidized student loans?

Direct Subsidized Loans and Unsubsidized Loans are available to students enrolled at least half-time in an eligible college or career school. These loans come with a variety of borrower protections, including access to income-driven repayment plans and potential loan forgiveness.

Because of this, these loans are generally the best option for borrowers.

“Federal loans typically offer more consumer protections and benefits than private student loans,” says Derenda King, a certified student loan professional (CSLP) and student loan adviser at Student Loan Planner.

Current private student loan rates

How do subsidized and unsubsidized loans compare? 

These two loan types come with the same fixed interest rate for undergraduates, but they differ in other ways. One big difference is who pays the interest while you're in school — you or the government.

Subsidized loans are available to undergraduate students who demonstrate financial need on the Free Application for Federal Student Aid (FAFSA), and the government pays the interest while you're in school, during your six-month grace period, and during other periods of deferment.

Unsubsidized loans are available to both undergraduate and graduate students, regardless of financial need. Unlike a subsidized loan, an unsubsidized loan requires you to pay the interest from the moment it's disbursed. The interest rate and borrowing limits for graduate and professional students are higher than those for undergraduates.

In addition, loan limits are higher for unsubsidized loans than subsidized loans.

Subsidized student loan limits

The subsidized loan limit is the same for dependent and independent undergraduates, and increases each year:

• First year: $3,500
• Second year: $4,500
• Third year and beyond: $5,500

Unsubsidized student loan limits

Unsubsidized loans are available to both undergraduates and graduates regardless of income, but the loan limits vary by your level in school and which year you're in.

The loan limits for undergraduate students are:

• First year: $5,500 (dependent students) or $9,500 (independent students)
• Second year: $6,500 (dependent students) or $10,500 (independent students)
• Third year and beyond: $7,500 (dependent students) or $12,500 (independent students)
• Aggregate limit: $31,000 (dependent students) or $57,500 (independent students)

The loan limits for graduate and professional students are:

• Per year: $20,500 (unsubsidized only)
• Aggregate limit: $138,500 (including undergraduate loans)

Interest rates for undergraduate and graduate students

For undergraduate students, the interest rate on both subsidized and unsubsidized loans is a fixed 6.53% for the 2024-25 school year. For graduate and professional students, the interest rate on an unsubsidized loan is 8.08%.

Both loan types have a 1.057% loan fee, whether you're an undergraduate or graduate borrower.

Interest rates don't change for the life of the loan. New interest rates go into effect annually on July 1, so the rates on loans taken out throughout your college years may vary somewhat from year to year.

Who qualifies for subsidized vs. unsubsidized loans?

Subsidized loans are available to undergraduates who demonstrate financial need and meet the basic eligibility criteria for federal aid. Because your need is based on a college's cost of attendance, there's no specific income threshold required to qualify.

The financial aid office at your school calculates your financial need using your FAFSA and a specific formula to determine your eligibility for subsidized loans.

Your school also determines the amount you're allowed to borrow based on how much other financial aid you receive. Need-based aid can't exceed your financial need, and receiving substantial need-based aid may reduce or even eliminate the amount of subsidized loans you're eligible to borrow.

You may still borrow unsubsidized loans, however. Unsubsidized loans are available to both undergraduates and graduate students regardless of financial need.

“If the school determined that less than the max was awarded, a student can petition the financial aid office to request up to the maximum allowed,” says Deanna O'Neal, a financial adviser at Vanderbilt Financial Group.

Pros and cons of subsidized student loans

The subsidized loan is generally considered your best option because of the interest subsidy. O'Neal recommends this loan first, but she cautions students to assess their true need to borrow before taking out loans.

Here's an overview of the pros and cons of subsidized loans:

Pros and cons of unsubsidized student loans

The main upside of unsubsidized loans is that they're available to everyone who meets the FAFSA eligibility requirements, including graduate students, regardless of financial need.

Here's an overview of the pros and cons of unsubsidized loans:

It's important to understand that interest begins accruing from the date an unsubsidized loan is disbursed. If you don't make interest payments while in school, interest may add up significantly.

“My recommendation is, at a minimum, to pay the monthly interest payments,” says O'Neal.

At the end of your six-month grace period, unpaid interest capitalizes, meaning it gets added to your loan balance, and then you're charged increased interest on that new balance.

Which loan option is right for you?

For undergraduates, subsidized loans are generally considered the best option because of the interest subsidy. If you don't qualify or it doesn't cover enough of your expenses, then you can explore unsubsidized loans.

As a graduate student, you are limited to the unsubsidized loan. O'Neal recommends caution before borrowing.

“Consider how much total debt you will be accumulating while in school,” she says. “Do the homework on all loan offerings and speak with a financial aid professional to understand your financial aid award and your loan options. These professionals can help you understand the borrowing impact on you.”