Published in: Student Loans | Jan. 3, 2020

Subsidized vs. Unsubsidized Student Loans: What's the Difference?

We are committed to full transparency as part of our mission to make the world smarter, happier, & richer. You should know that offers on The Ascent may be from our partners - it's how we make money. That transparency to you is core to our editorial integrity, which isn’t influenced by compensation.

Here's what students need to know about the two main types of federal student loans.

If you're enrolled in a degree or certificate program on at least a half-time basis, when you fill out the FAFSA, you might be offered two different types of federal direct student loan -- Direct Subsidized Loans and Direct Unsubsidized Loans. While both have some similar characteristics and advantages, subsidized loans have significantly better terms, especially while you're still in school.

With that in mind, here's a rundown of what students need to know about subsidized and unsubsidized student loans, how much you may be able to borrow of each one, and the important benefits common to both.

A college professor speaking to students seated in a lecture hall.

Image source: Getty Images

What is a subsidized student loan?

There are two main types of federal direct student loans -- subsidized and unsubsidized. And the simple version is that subsidized loans are better. While both types of loans charge interest, the government pays the interest on subsidized student loans (officially known as Direct Subsidized Loans) during certain times, specifically: 

  • While you're enrolled in school on at least a half-time basis.
  • While you're in the six-month grace period after leaving school.
  • When your loans are on a deferment.

This means that when you graduate and start making loan payments, your loan balance will be the same as the amount of money you initially borrowed. For example, if you obtain a $2,000 subsidized student loan during your freshman year and graduate four years later, that loan's balance will still be $2,000. Even though you've had the borrowed money for four years, you won't be responsible for a penny of interest for the time you were in college. This is a big benefit of subsidized loans over unsubsidized student loans and any other type of education borrowing.

Subsidized student loans are need-based, meaning that you must have a demonstrated financial need in order to obtain one. Your school determines the amount of subsidized student loans you can take out, and the total cannot exceed your financial need.

While you can receive federal student loans for as long as you're in school, assuming you haven't hit the aggregate borrowing limit (see below), there's a time limit on when you can receive subsidized student loans. Specifically, you can only receive subsidized loans for up to 150% of the published length of your degree program. In other words, if you're enrolled in a four-year bachelor's degree program, your eligibility for subsidized loans expires after six years, regardless of your academic standing or financial need.

Finally, subsidized student loans are only available to undergraduate students -- graduate and professional students are ineligible, regardless of their demonstrable financial need.

How does an unsubsidized student loan work?

The other type of federal direct loan is the Direct Unsubsidized Loan. The downside of these is that the government never pays the interest on unsubsidized loans. Borrowers are responsible for the interest that accrues on these loans at all times, even when they aren't required to make payments.

For example, if you borrow a $5,000 unsubsidized loan during your freshman year, by the time you graduate, the balance will be significantly larger than the $5,000 you borrowed. At a 6% interest rate for four years, you would have more than $1,000 tacked on to your principal by the time repayment started.

On the other hand, unsubsidized loans are easier to get. They are not need-based. Your ability to borrow is based on the government's loan limits (discussed below) and your school's cost of attendance, as opposed to your ability to demonstrate that you need the money. And as you'll see in the charts below, the annual and lifetime maximum borrowing limits for unsubsidized loans are generally higher than the subsidized loan limits.

Just like subsidized loans, you don't have to make payments on unsubsidized loans while you're enrolled in school or for the grace period that extends through the first six months after you graduate or drop below half-time enrollment. But the difference is that you accumulate interest during these periods.

Is it better to get subsidized or unsubsidized loans?

As you can see, subsidized student loans have some key advantages over their unsubsidized counterparts. However, both varieties of federal direct student loans have some pretty important benefits when compared with other methods of borrowing money such as personal loans or private student loans. Here are some of the most important examples:

  • Neither type of federal direct student loan has any credit requirements. Private loans and personal loans typically have minimum credit standards or require a cosigner.
  • Federal direct student loans are eligible for income-driven repayment plans such as Pay As You Earn and Income-Based Repayment. These limit your monthly student loan payments to a certain percentage of your discretionary income and forgive any remaining balance after a certain repayment period (20 or 25 years).
  • Federal direct loans may be eligible for Public Service Loan Forgiveness and/or Teacher Loan Forgiveness if the borrower's employment and repayment plan meet the program's standards. On the other hand, private student loans never qualify for these programs.
  • You have the ability to obtain a deferment or forbearance on federal student loans, which can allow you to temporarily stop making payments during tough financial times. Some private loans have their own forbearance programs, but the federal options are generally far superior.

How much can I borrow?

Obviously, it would be ideal if you could simply get subsidized student loans for 100% of your educational borrowing needs. Unfortunately, it doesn't work that way as there are limits on the amount you can borrow. For that matter, you might not even be able to obtain unsubsidized loans to cover your entire financial need.

Dependent student borrowing limits for subsidized and unsubsidized loans

The Department of Education limits the amount of federal student loans that each borrower can obtain. First, here are the annual and aggregate maximums for dependent students:

Year in School

Subsidized Loan Limit

Overall Federal Student Loan Limit (Including Subsidized)

First year

$3,500

$5,500

Second year

$4,500

$6,500

Third year and beyond (undergraduate)

$5,500

$7,500

Graduate or professional

N/A

N/A

Aggregate (total) federal loan limit

$23,000

$31,000

Data source: Department of Education. All graduate and professional students are considered independent for student loan borrowing purposes.

Independent student borrowing limits for subsidized and unsubsidized loans

If you're considered to be an independent student, the overall borrowing limits are considerably higher, although the subsidized student loan limits are exactly the same as they are for dependent students:

Year in School

Subsidized Loan Limit

Overall Federal Student Loan Limit (Including Subsidized)

First year

$3,500

$9,500

Second year

$4,500

$10,500

Third year and beyond (undergraduate)

$5,500

$12,500

Graduate or professional

N/A

$20,500

Aggregate (total) federal loan limit

$23,000 ($65,500 for graduate or professional students)

$57,500 (undergrad), $138,500 (graduate/professional)

Data source: Department of Education. Prior to July 2012, graduate and professional students were eligible for subsidized loans.

Both types are generally superior to private alternatives

If the federal student loan borrowing limits won't cover your entire education costs, you can obtain private student loans, which are generally only limited by your school's overall cost of attendance and your (or your cosigner's) credit qualifications.

However, it's still a smart idea to use your federal student loan borrowing ability before exploring private options. Federal student loans -- even unsubsidized -- are generally superior to even the best private student loans. This is because of the benefits discussed earlier, particularly the possibility of deferment, income-driven repayment, and forgiveness programs.

So it's a good idea to use subsidized loans first if you can get them, followed by unsubsidized loans. If and only if you still have financial need, it's then a good idea to look into other options such as private loans and PLUS Loans (if you're a graduate student) to bridge the gap.

Save thousands on student loan interest

Many people are missing out on lower student loan interest rates because they don't take the time to research their refinancing options. Our picks of the best student loan providers can help you save thousands of dollars in interest over time. Click here to uncover the best-in-class student loans providers we could find in 2020.