Subsidized vs. Unsubsidized Student Loans: Know the Difference

The U.S. Department of Education offers several types of student loans to college students, including subsidized and unsubsidized loans. 

Subsidized loans are the more affordable option, since the government pays off the accruing interest while you’re in school. However, unsubsidized loans can also be a worthwhile choice, especially if you don’t qualify for subsidized loans or if you hit your borrowing limit and need more funding for school. 

Here’s a closer look at subsidized vs. unsubsidized loans to better understand the key similarities and differences between the two. 

Direct Subsidized Loans

Direct Subsidized Loans are a type of federal student loan available to undergraduate students with financial need. They’re the most affordable student loan that the Department of Education offers, since they come with an interest subsidy. This means the government covers interest charges while you’re enrolled in school at least half-time and during other periods of student loan deferment. 

For example, if you borrow $10,000 in subsidized loans during your freshman year, you’ll still owe $10,000 at the end of your grace period — no additional interest charges will accrue. 

For the 2023-24 academic year, Direct Subsidized Loans come with a fixed interest rate of 5.50% and a loan fee of 1.057%. They’re eligible for a variety of repayment plans, including the 10-year standard plan, extended repayment, graduated repayment, and income-driven repayment. 

These loans are also subject to annual borrowing limits. For dependent students, the limits are $3,500 for your first year, $4,500 for your second year, and $5,500 for your third year and beyond. The total aggregate subsidized loan limit for undergraduates is $23,000. 

Direct Unsubsidized Loans

Unlike subsidized loans, Direct Unsubsidized Loans don’t come with an interest subsidy. These loans start accruing interest from the date of disbursement, so if you don’t make payments while you’re in school, you could face significant interest charges by the end of your grace period.

On the plus side, Direct Unsubsidized Loans are available to both undergraduate and graduate students, and they don’t have a financial need requirement. Anyone who’s eligible for federal financial aid can access Direct Unsubsidized Loans.

In the 2023-24 school year, Direct Unsubsidized Loans come with a fixed interest rate of 5.50% for undergraduates and 7.05% for graduate and professional students, as well as a loan fee of 1.057%. Similar to Direct Subsidized Loans, Direct Unsubsidized Loans are eligible for a variety of repayment plans, including the standard, extended, graduated, and income-driven plans.

Unsubsidized student loans also have higher borrowing limits, with an aggregate limit for dependent undergraduate students of $31,000, and $138,500 for graduate or professional students. 

Subsidized vs. unsubsidized loans: Key differences

^{[*Federal student loan rates are for the 2023-24 academic school year]}

How to choose between subsidized and unsubsidized debt

It’s generally a good idea to max out your eligibility for subsidized loans before turning to unsubsidized options. Subsidized loans have lower costs of borrowing than unsubsidized loans, since the government covers interest charges while you’re in school and during your grace period.

If you’ve hit your borrowing limits and need additional funding for school, an unsubsidized federal loan could make sense. Even though these don’t come with an interest subsidy, they do have relatively low fixed interest rates, easy-to-meet eligibility requirements, and flexible repayment options.

To access Direct Subsidized and Unsubsidized Loans, you must submit the Free Application for Federal Student Aid (FAFSA) on a yearly basis.

Check Out: How To Register for the FAFSA

Alternatives to subsidized and unsubsidized loans

Direct Subsidized and Unsubsidized Loans aren't your only source of funding for college. Here are some other options that can help you cover costs:

• Grants and scholarships: Pursuing grants and scholarships could seriously pay off, as these are a form of gift aid that you typically don’t have to pay back. Use scholarship search engines and ask your school counselor or financial aid office about award opportunities.
• Work-study: Students with financial need might also qualify for the federal work-study program, which connects students with part-time on- and off-campus jobs. The positions pay at least federal minimum wage and are often related to your course of study.
• Income from a part-time job: If you don’t qualify for work-study, you could also consider working part-time as you earn your degree, and potentially borrow less in student loans.
• Direct PLUS Loans: Graduate students and parents of undergraduates can also borrow federal Direct PLUS Loans. You can borrow up to your school’s cost of attendance, minus any other financial aid you’ve received. These loans require that you don’t have adverse credit or, if you do, that you apply with an endorser who has strong credit. You must also undergo credit counseling.
• Private loans: Private student loans from a bank, credit union, or online lender are another option. Interest rates and terms will vary by lender, and borrowers with good or excellent credit will get the lowest rates.