What is the difference between a federal subsidized and unsubsidized loan

Financial Aid

Table of Contents Show

• What are Subsidized Loans?
• What are Unsubsidized Loans?
• What Do Subsidized and Unsubsidized Loans Have in Common?
• Learn more about federal student loans
• How Are Subsidized And Unsubsidized Federal Loans Similar?
• How Are Subsidized And Unsubsidized Federal Loans different?
• How Much Can I Borrow In A Subsidized Or Unsubsidized Loan?
• How Much Will I Pay?
• Are Subsidized Loans Better Than Unsubsidized Loans?

The differences between Subsidized and Unsubsidized Loans include the timing of when interest starts accruing, the eligibility for awarding based on financial need, and the maximum amount permitted.

In the financial aid packages you received recently, you likely noticed one or two federal student loans. The Federal Direct Student Loan, commonly referred to as the Stafford Loan (its former name) or the William D. Ford Loan (its official name), is awarded to almost every student who submits a FAFSA. It's a loan funded by the federal government, and is included as a part of financial aid because of its low, fixed interest rate and favorable repayment options. The Direct Loan comes in two formats: Subsidized and Unsubsidized. What's the difference between the two? Read on.

What are Subsidized Loans?

• Both Subsidized and Unsubsidized Loans accrue interest while you're in school, but the U.S. Department of Education will pay the interest on your Subsidized Loan until six months after you graduate or until you drop below half-time enrollment. That means the Subsidized Loan will ultimately cost you less over time than your Unsubsidized Loan.
• Subsidized Loans are awarded based on financial need. Schools start with their Cost of Attendance (the total cost for one year at that school) and subtract your Expected Family Contribution (the amount your family can pay for one year of school) to determine your financial need. They then do their best to fill in this need with need-based financial aid, including the Federal Direct Subsidized Loan.
• You can receive, at max, $3,500 in a Subsidized Loan for freshman year. And the combination of your Subsidized and Unsubsidized Loans cannot exceed $5,500. 

What are Unsubsidized Loans?

• You don't have to demonstrate any financial need to receive an Unsubsidized Loan.
• You can receive, at max, $5,500 in an Unsubsidized Loan for freshman year. And the combination of your Subsidized and Unsubsidized Loans cannot exceed $5,500.
• Though your Unsubsidized Loan will accrue interest while you're in school, you don't need to pay that interest until six months after you graduate or until you drop below half-time enrollment.

What Do Subsidized and Unsubsidized Loans Have in Common?

• Both have the same fixed interest rate. That rate for the upcoming academic year's loans is determined at the end of May every year, and is set for the life of the loans. You can view the current interest rate here.
• Both have an origination fee, which will be subtracted from the loan amount before the loan funds are placed in your student account. You can view the current origination fee here.
• You'll need to complete entrance counseling and sign a Master Promissory Note before receiving your loans. Your college will provide instructions on how to complete these requirements.
• You'll have several options on how to repay your loans once repayment begins.

You'll need to submit your FAFSA every year to receive your Federal Direct Student Loans, so make sure that's on your radar. And know that you don't need to borrow the full amount of student loans that you receive. You can request that your financial aid office reduce your loan amount anytime.

Learn more about federal student loans

For most Americans headed to college, taking out a loan to pay for college is a necessity. But once you get into the weeds of learning about the different types of loans, things can get confusing. 

Ideally, you're starting to pay for college with any need-based and merit-based aid, then savings and cash. Then, you're applying for loans. 

Taking out a Federal loan can help protect yourself and get a lower rate. But what's the difference between a subsidized and unsubsidized Federal loan? Before we find out how they're different, it's essential to realize how they're similar. 

How Are Subsidized And Unsubsidized Federal Loans Similar?

The Federal government offers college undergraduate students access to both subsidized and unsubsidized loans. 

Both loans offer government-sponsored protections for students, such as flexible repayment plans and low-interest rates.

If eligible, students may take out both types of loans, but they can not exceed the Federal borrowing limit annually. 

How Are Subsidized And Unsubsidized Federal Loans different?

The most significant difference between the two loans is if you are required to pay interest while students matriculate in college. Students also have to qualify for the loans based on need.

Students must have a financial need to qualify for a subsidized loan. While the student is in college, the federal government "subsidizes" the loan by paying the loan's interest until six months after the student graduates. Students must be enrolled at least half-time in college to keep this status. Over the loan period, students may qualify for grace or delay of payment if the government decides the student is facing economic hardship or began military service. 

Any college student can qualify for an unsubsidized loan, regardless of a student's or their parents' income. How much money is awarded will depend on the student's year in school, any other financial aid they've already received, and the student's total cost of attending their college. However, while the student is still attending college, they must pay interest on the loan, including any interest that builds during grace periods or breaks from payment. 

How Much Can I Borrow In A Subsidized Or Unsubsidized Loan?

The maximum amount a student can borrow depends on if their parents claim them as a dependent or not. 

For undergraduate students who are claimed as dependents, the maximum allowed amount borrowed is $31,000 in all loans over four years, but only $23,000 of that can be from subsidized loans. 

Independent undergraduate students may borrow $57,500 for four years, with that same limit of $23,000 of subsidized loans. 

For graduate students, who are always considered independent by the Federal government, they can borrow $138,500, with a cap of $65,500 in subsidized loans. However, any federal student debt the graduate student incurred during undergraduate studies is deducted from this amount. 

In all cases, students can not borrow more than it costs to attend their school. However, for most students, this won’t cover the full cost of college. Any federal loans a student takes won’t inhibit them from taking additional loans from private lenders.  

How Much Will I Pay?

How much you will pay for college and back on your loans will depend on a few factors: how much it costs for you to attend your college, your financial status, and what year you are in school. 

Let's say that it costs a student $20,000 a year to attend an undergraduate college. If the student obtains their degree in four years, they will spend $80,000. If the student's parents claim them as a dependent, they can take out $23,000 in subsidized loans and $8,000 in unsubsidized loans, for a total of $31,000. So, after all loans, the student will still have to pay $49,000 for college plus any interest incurred on the $8,000 unsubsidized loan while they attended college.    

To pay for the remaining $49,000, students can use any cash they or their parents have on hand, any savings from a 529 plan, apply for private loans, or apply for merit-based scholarships. 

For the student who is financially independent, if they too choose to attend a school that costs $20,000 a year to attend or $80,000 over four years, what they pay will be different. Independent students can take out a total of $23,000 of subsidized loans and $34,500 in subsidized loans. So, after loans, this student would need to pay only $22,500, plus the interest on the $34,500 loan.  

Are Subsidized Loans Better Than Unsubsidized Loans?

When deciding which type of loans to apply for, students who qualify for subsidized student loans should elect to take those first. Since subsidized loans don't accrue interest while a student is in college, this will ultimately help the student pay less over time. Subsidized loans also generally have favorable interest rates. Always try to utilize subsidized loans first. 

Unsubsidized loans are still a necessary and solid option for students to help pay for the overall cost of college, but students should have a plan to pay down the interest. If possible, consider applying for an unsubsidized loan later in your college career to give the loan less time to accrue interest. For example, if you can use the subsidized loan to help pay for the first year of college, any cash, and 529 plans to get you to sophomore year, you just erased an entire year of interest payments, saving you a couple hundred to thousand dollars.