Subsidized vs. Unsubsidized Loan Interest Rates

During the 2022-23 school year, each undergraduate student received an average of $3,860 in federal student loans, according to College Board. When you apply for federal financial aid, you may be offered Direct Unsubsidized Loans. These loans are widely accessible to undergraduate and graduate students, and don't have the same restrictions as Direct Subsidized Loans. The federal unsubsidized loan interest rate is fixed but can change from year to year, based on what Congress sets annually.

Unsubsidized loan interest rates are typically different for undergraduate and graduate students. As a student loan borrower, knowing your interest rate and how it affects your overall loan cost is a key part of responsible borrowing. Read on to learn more about student loan interest rates and some important differences between unsubsidized and subsidized loans.

Current federal student loan interest rates

Federal student loan interest rates change every year. Each year, new federal loan interest rates are set and apply to loans from July 1 of that year to June 30 of the next.

Interest rates on federal loans are set using a formula in the Higher Education Act of 1965 (HEA). The rate is based on the high yield of the 10-year Treasury notes, plus an added percentage, according to Federal Student Aid. Here are current federal student loan interest rates for loans disbursed on or after July 1, 2024, and before July 1, 2025:

• Direct Subsidized and Unsubsidized Loan (undergraduate): 6.53%
• Direct Unsubsidized Loan (graduate): 8.08%
• Direct PLUS Loan: 9.08%

Subsidized vs. unsubsidized loan interest rates

Subsidized loan interest rates and terms

Direct Subsidized Loans are only available to undergraduate students that have financial need. The interest rate for subsidized loans is currently at 6.53% for the 2024-25 academic year. The subsidized loan interest rate and your principal balance determine how much interest you'll pay over the life of the loan. But there's one major perk that can help.

Undergraduate borrowers who qualify for subsidized loans receive an interest subsidy from the federal government. The U.S. Department of Education pays interest on these loans in several instances:

• While you're in school (must be at least half-time)
• During the 6-month grace period after graduating or leaving school
• During periods of deferment

This can lead to major savings on total interest costs, reducing how much you owe when you graduate.

Unsubsidized loan interest rates and terms

Direct Unsubsidized Loans are available to both undergraduate and graduate students, and these loans don't have a financial need requirement. These loans are more accessible, but on the flip side, borrowers don't get an interest subsidy at any time.

The unsubsidized loan interest rate is different for undergraduate borrowers and graduate borrowers. For the 2024-25 academic year, undergraduate borrowers enjoy a lower rate at 6.53% for unsubsidized loans. Notably, this is the same interest rate as subsidized loans for undergraduate borrowers.

Graduate borrowers have an unsubsidized loan interest rate of 8.08%. Both undergraduate and graduate borrowers will pay more in interest compared to subsidized loan borrowers. However, graduate loan borrowers can expect to pay even more given the higher interest rate.

Are student loan interest rates rising?

Student loan interest rates are rising, going up over two percentage points over the past few years. As the Federal Reserve has increased interest rates over the years to counteract the impact of inflation, the cost of borrowing has gotten more expensive. This significant shift impacts student loan borrowers, who will pay more in interest with higher rates. However, the Federal Reserve has not raised the federal funds rate (which affects interest rates on loans) since July 2023.

Based on the HEA, Direct Subsidized and Unsubsidized Loan interest rates for undergraduate students have a maximum limit that's capped at 8.25%. Unsubsidized loans for graduate students have an interest rate cap of 9.50%, while PLUS loan rates can't exceed 10.50%.

Tips to lower interest costs

Here are some ways you can reduce your interest costs:

• Submit the FAFSA: When you fill out and submit the Free Application for Federal Student Aid (FAFSA), you may qualify for federal financial aid like scholarships and grants, which don't require repayment, in addition to federal student loans.
• Take out federal loans before private: Max out your available federal loans before turning to private student loans. Federal loans come with unique benefits, like access to student loan forgiveness and multiple repayment options, plus fixed rates that make repayment more predictable.
• Only borrow what you need: You may get offered more student loans than you need, but taking out more than necessary will lead to more interest costs. Calculate exactly what you need to cover tuition, books, and living costs and only borrow the amount you need.
• Make payments while you're in school: Unsubsidized loans accrue interest while you're in school. If you're able to make payments while you're in school, it can prevent your balance from growing too much.

FAQ

How much can you borrow in unsubsidized loans?

Unsubsidized loan limits depend on several factors, including whether you're an undergraduate or graduate student, your current year in school, and whether you're a dependent or independent student. In the 2024-2025 academic year, first-year undergraduate students with a dependent status can borrow up to $5,500 in unsubsidized loans, whereas independent students can borrow up to $9,500. The aggregate unsubsidized loan limit for dependent undergraduate students is $31,000, and $57,500 for independent students.

What type of student loan has the lowest interest rate?

The Direct Subsidized and Direct Unsubsidized Loan interest rates for undergraduate students are the lowest, at 6.53%. You may be able to qualify for a lower interest rate on a private student loan if you have a cosigner with excellent credit, but this varies by lender.

Are subsidized or unsubsidized student loans better?

Federal Direct Subsidized Loans are a better option than Direct Unsubsidized Loans, as they come with more borrower benefits. Direct Subsidized Loan borrowers get interest on the loans covered by the U.S. Department of Education while in school, deferment, and the grace period. Direct Unsubsidized Loan borrowers don't qualify for an interest benefit. However, borrowers must have a financial need to be eligible for Direct Subsidized Loans.