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Government Student Loans: Unsubsidized vs. Subsidized Student Loans

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Student loans can be a way to turn your career dreams and passions into a reality. When it comes to making decisions about how you’ll finance your future, you’ll want to understand the difference between unsubsidized and subsidized student loans — because it can save you a lot of money. Let’s get started.

Paying for Higher Education

In order to help cover the costs of higher education, including four-year university, community college, trade schools, technical schools, or career schools, the federal government offers both subsidized and unsubsidized student loans through the U.S. Department of Education. These are direct loans, and are sometimes referred to as Stafford Loans, or Direct Stafford Loans. Let’s take a look at subsidized loans first.

Subsidized Student Loans

Direct subsidized student loans are for undergraduate students with financial need. The subsidy here is that the U.S. Department of Education will pay the interest on your loan while you’re in school at least half-time, and for the first six months after you leave school. This means you save a lot of money on interest. Subsidized student loans include Direct Subsidized Loans, Subsidized Federal Stafford Loans, and Federal Nursing Loans.

Financial Need

In order to receive a subsidized loan, you must demonstrate financial need. A student’s financial need is calculated based on his or her expected family contribution (EFC), academic level and the anticipated cost of his or her education (including tuition, room and board, and books). Worksheets that show how the EFC is calculated are available at, or you can request a free copy of the EFC Formula by calling 1-800-4ED-PUBS, and asking for the Federal Student Aid Handbook.

How Much Can I Borrow?

With subsidized student loans, there’s a limit on how much you may borrow. In your first year of undergraduate school, the limit is $3,500. This amount goes up to $4,500 in your second year, and $5,500 in your third year.

Pros and Cons


  • No interest is accrued if you are enrolled in school
  • After graduation, the loan will not accrue interest for six months
  • Income driven repayment plans
  • Eligible for deferment
  • Eligible for forbearance
  • Fixed interest rate
  • No credit check
  • Tax deductible interest
  • No prepayment penalties
  • Multiple repayment plan options
  • Eligible for loan forgiveness based on public service work


  • Based on financial need
  • Amount borrowed may not exceed financial need
  • Limits on how much you can borrow
  • May not cover the full cost of education
  • Only available to undergraduate students

Unsubsidized Student Loans

Direct unsubsidized student loans are available to both undergraduate and graduate students, with no need to demonstrate financial need. In contrast to subsidized loans, you pay the interest on unsubsidized student loans. While you’re in school, you may choose not to make interest payments, however, when you do this, the interest will accumulate and be added to your total loan amount. Essentially, you start paying interest on your interest — not the most advantageous financing option. Unsubsidized student loans include:

  • Direct Unsubsidized Loans
  • Unsubsidized Federal Stafford Loans
  • Direct PLUS Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Federal Perkins Loans
  • Health Education Assistance Loans

Pros and Cons


  • Covers the cost of your education above and beyond subsidized loans
  • Offers lending options to students who don’t qualify for need based financial aid
  • Available to undergraduates and graduate or professional degree students
  • No credit check
  • No collateral
  • Fixed interest rate
  • Lower interest rate compared to private loans
  • No co-signer
  • Eligible for deferment
  • Flexible repayment plans


  • You pay the interest
  • Interest accrues
  • Interest is capitalized
  • Higher interest rate for graduate students

Repayment Options

One of the benefits of both unsubsidized and subsidized direct student loans, as well as Federal Family Education Loans (FFEL), are the repayment options — there are many of them. They include:

  • Standard– payments are fixed.
  • Graduated– payments are lower at first, then increase gradually.
  • Extended– payments may be fixed or graduated.
  • Revised pay-as-you-earn– monthly payments will be 10 percent of discretionary income.
  • Pay-as-you-earn– maximum monthly payments will be 10 percent of discretionary income.
  • Income-based– payments will be 10 or 15 percent of discretionary income.
  • Income-contingent– payments will be either 20 percent of your discretionary income, or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
  • Income-sensitive– payments based on annual income.

You may also want to use this repayment estimator to estimate your student loan payments.

What About Interest Rates?

Whether you choose subsidized or unsubsidized loans, or both, you’ll want to know what interest rate you’ll be paying. According to the U.S. Department of Education, the interest rate for loans disbursed after 7/1/17 and before 7/1/2018 are as follows:

Unsubsidized vs. Subsidized Interest Rates
Loan Type Borrower Type INTEREST RATE
Direct Subsidized Loans Undergraduate 4.45%
Direct Unsubsidized Loans Undergraduate 4.45%
Direct Unsubsidized Loans Graduate or Professional 6%


Another of the many benefits of both unsubsidized and subsidized student loans is the ability to consolidate multiple loans into a single direct consolidation loan. This simplifies multiple student loan payments into one monthly payment.

Other Options

If the cost of getting an education exceeds the amount you can borrow from both subsidized and unsubsidized student loans, then Direct Plus Loans and private students loans could be options for you.

With Plus loans, the government is your lender, and the amount you can borrow is limited to the cost of attendance, minus any other financial aid you receive.

Private student loans are meant to cover any additional costs you may incur while getting your education. While beneficial, keep in mind that private student loans may not offer the forbearance or deferment options you have with federal loans, and you may not have as many repayment options.

Both of these loans are not subsidized, and your loan amount and interest rate will be based on your creditworthiness.

Which Is Better?

In deciding between unsubsidized and subsidized student loans, there are two factors to consider — your need for financial assistance and the cost of attending school.

If you can prove financial need, and the cost falls within the borrowing limits, subsidized student loans make sense. Because the government will pay your interest while you’re in school, and for six months after you graduate, you’re going to save a lot of money using this financing option.

If subsidized student loans won’t cover the entire cost of your education, or if you simply can’t prove financial need, then unsubsidized loans are the way to go. Although you’ll be paying more in interest, you’ll still have many payment options available after you graduate.

For most students, a combination of these two loans will be used to cover the full cost of their higher education. If you have questions about how you can pay for college, or need additional money to cover the cost of your education, contact LendingTree today.


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