Subsidized vs. unsubsidized loans: How these federal student loans compare

The federal student loan system offers a handful of financing options, including Direct Loans. Depending on your situation, you might have access to subsidized or unsubsidized loans — or possibly both.

For many students, borrowing money to pay for school is a necessary step. Over 30% of undergraduates in the 2020-21 academic year received some type of federal student loan, according to the latest data from the National Center for Education Statistics.

If you’re considering federal Direct Loans as a financial source, here’s what to know about subsidized vs. unsubsidized loans and how to get them.

Subsidized vs. unsubsidized loans: What to know

A key distinction between Direct Subsidized vs. Unsubsidized Loans is who pays for interest charges after disbursement, and the type of student who can access each loan.

Here’s a general comparison table of the two options for the 2023-24 school year:

More details about Direct Subsidized Loans

Subsidized loans are only available to undergraduate students who’ve shown financial need on their Free Application for Federal Student Aid (FAFSA). If your financial aid package includes Direct Subsidized Loans, the loan amount offered depends on your overall financial picture.

The biggest advantage of subsidized loans is that the Department of Education pays for the interest that accrues while you’re not in active repayment. This includes the time during in-school enrollment (at least half-time), your grace period, and other periods of deferment.

The only downsides are that they’re need-based so aren’t accessible to all undergraduate students, and loan amounts are limited. Your school determines the subsidized loan amount you qualify for, but there are also borrowing limits based on your year in school:

• Year 1: $3,500
• Year 2: $4,500
• Year 3+: $5,500

The aggregate subsidized loan limit for your undergraduate program is $23,000.

More details about Direct Unsubsidized Loans

Direct Unsubsidized Loans aren’t need-based, meaning you don’t have to demonstrate financial hardship on your FAFSA. Instead, you only need to meet the minimum requirements for federal aid to qualify. For example, being a U.S. citizen or eligible noncitizen, pursuing an eligible program at least half-time, and maintaining satisfactory academic progress.

The benefit of Direct Unsubsidized Loans is that they offer higher loan amounts compared to subsidized loans. However, how much you can borrow also depends on your other financial aid options.

Similar to subsidized loans, there are limits to how much you can borrow in unsubsidized loans, based on your year in school and dependency status. Assuming you didn’t also borrow any subsidized loans, here are the borrowing limits for Direct Unsubsidized Loans:

• Year 1: $5,500 for dependents; $9,500 for independent students
• Year 2: $6,500 for dependents; $10,500 for independent students
• Year 3+: $7,500 for dependents; $12,500 for independent students
• Graduate or professional students: $20,500

The aggregate borrowing limit for unsubsidized loans is $31,000 for dependent undergraduate students, $57,500 for independent undergraduates, and $138,500 for graduates and professionals (including loans borrowed for undergraduate programs).

Although the ability to cover gaps in your education costs is a perk, the downside of unsubsidized loans is you’re responsible for paying 100% of the interest on the loan. You don’t have to pay the interest charges immediately and it will automatically be deferred until you enter repayment — but interest will be added to your account from the moment you receive the loan funds.

Should I borrow subsidized or unsubsidized loans?

When borrowing for college, most students turn to federal student loans before private loans. Federal student loans offer many valuable benefits and protections for borrowers, such as access to income-driven repayment plans and loan forgiveness programs.

If you qualify for both subsidized and unsubsidized federal loans, opt for subsidized loans first to maximize your interest savings. Then, consider borrowing unsubsidized loans — followed by private student loans, if necessary — to cover essential education costs.

How to apply for subsidized and unsubsidized loans

To see if you qualify for subsidized or unsubsidized federal loans, follow these steps:

1. Complete the FAFSA: You must submit the FAFSA for each year you need federal aid. You’ll fill out your personal information and financial details (including information from bank statements, tax returns, and other sources of income). If you’re a dependent student, you’ll also need to include a parent’s information.
2. Review your financial aid package: Once your FAFSA has been processed, your school will send you a financial aid letter. Read through your school’s financial aid options to see if you qualified for subsidized or unsubsidized loans. If you did, you’ll also see the maximum amount offered for each type.
3. Accept the loans and determine your amounts: You’re not required to accept every loan that’s offered, nor are you required to accept the full amount available. Borrow only what you reasonably need for the school year to avoid taking on needless student loan debt.
4. Complete loan entrance counseling: If you’ve never received a Direct Loan, you’ll have to complete entrance counseling. It takes about 30 minutes and is designed to help you understand your education charges, ways to pay, and how to prepare for repayment in the future.
5. Sign your Master Promissory Note: This is the official loan agreement that outlines the details of your loan and repayment expectations.

Once these steps are complete, the loan funds will be disbursed to your school’s financial aid office. Your school will apply the loan directly to any outstanding charges on your account, including tuition, fees, and room and board. Any remaining Direct Loan funds will be sent to you.

Alternatives to these federal loans

If you’re not eligible for Direct Subsidized or Unsubsidized Loans, explore other federal loan options, like Direct PLUS Loans. These loans are available to graduates and professionals, as well as parents of dependent students.

If federal loans aren’t an option or you’ve reached the borrowing limit, third-party lenders offer private student loans that can bridge the financial gap. Shop around with a handful of lenders to compare loan features and rates to ensure you find the right one for your needs.