Private Student Loans for February 2024
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Subsidized vs. Unsubsidized Student Loans: Which Is Better for College?

Updated on:
Content was accurate at the time of publication.

When choosing between subsidized vs. unsubsidized student loans, it’s generally best to go with subsidized loans since it charges less interest.

However, borrowers must demonstrate financial need to qualify for subsidized student loans. Unsubsidized student loans are still a good option since they typically offer better rates and terms than private student loans — plus anyone can get an unsubsidized loan, regardless of income.

The Department of Education offers two main types of federal Direct student loans: subsidized and unsubsidized. Both loans provide low fixed-interest rates and flexible repayment plans, as well as access to forbearance and deferment and student loan forgiveness programs.

If you qualify, you should ideally max out subsidized loans first since the government covers a portion of the interest while you’re enrolled in school, during your grace period and if your loans are in deferment.

Key differences between subsidized and unsubsidized loans

SubsidizedUnsubsidized
Eligible studentsUndergraduates onlyUndergraduate, graduate and professional degree students
Financial requirementsMust demonstrate financial needAvailable to everyone, regardless of income
Borrowing limits for dependent undergraduate students
  • First year: $3,500
  • Second year: $4,500
  • Third or more years: $5,500
  • Aggregate limit: $23,000
  • First year: $5,500
  • Second year: $6,500
  • Third or more years: $7,500
  • Aggregate limit: $31,000
*The above limits also include any subsidized loans
Borrowing limits for independent undergraduate students
  • First year: $3,500
  • Second year: $4,500
  • Third or more years: $5,500
  • Aggregate limit: $23,000
  • First year: $9,500
  • Second year: $10,500
  • Third or more years: $12,500
  • Aggregate limit: $57,500
*The above limits also include any subsidized loans
Borrowing limits for graduate studentsNot available to graduate students
  • Annual: $20,500
  • Aggregate limit: $138,500 (includes all loans from undergraduate — with a total of $65,500 in subsidized loans allowed)
Interest detailsGovernment pays interest while you’re in school, during the grace period or defermentInterest accrues from the time your loan is disbursed, regardless of your enrollment status

  • Amount borrowed: Keeping within federal limits, your school determines the amount you can borrow. After you submit your Free Application for Federal Student Aid (FAFSA), the school will offer a financial aid package detailing how much you can borrow in subsidized and unsubsidized loans. (More on this below)
  • Interest rates: The subsidized and unsubsidized loan interest rate for undergraduates is 5.50% for any loans you take out now. The unsubsidized interest rate is 7.05% for graduate students.
  • Loan fees: For subsidized and unsubsidized federal student loans, the fee charged to the aggregate total is 1.057% for any loans you take out now. A new fee is set each October for any loans you take out in the future.

Borrowers must meet the following requirements to receive any type of federal student loan, including subsidized and unsubsidized student loans:

To qualify for federal direct subsidized loans, you must demonstrate financial need. The amount you can expect to receive will be determined by the federal student loan limits and your school’s financial aid package

Here are three steps to apply for subsidized and unsubsidized federal student loans, as well as grad PLUS loans, work-study opportunities, grants and school-based aid.

1. Submit your FAFSA

The Free Application for Federal Student Aid (FAFSA) application is typically open Oct. 1 to June 30, although there are exceptions: The opening was delayed to Dec. 1, 2023 for the 2024-2025 school year, because of changes being made to the form.

Try to submit your application well before the FAFSA deadline since funds are limited and distributed on a first-come, first-served basis.

2. Review your financial aid award letter

Aid packages are determined based on your Student Aid Index (formerly known as the Expected Family Contribution) and your school’s cost of attendance. You will receive a report outlining how much you can borrow with subsidized and unsubsidized loans, along with any work-study and Pell Grant awards.

Remember, subsidized funding will typically save you the most money since the government pays part of the interest while you’re in school and during the grace period.

However, borrowing unsubsidized loans is generally better than private student loans since they tend to have lower interest rates and more flexible repayment terms.

3. Complete entrance counseling

You will need to complete entrance counseling at StudentAid.gov before receiving your first subsidized or unsubsidized student loan. This process takes approximately 30 minutes and must be completed in a single session.

If you are a first-year undergraduate, you may not receive your loan money until 30 days after the first day of enrollment. Check with your school’s financial aid office for more details.

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Be aware of overborrowing


Don’t feel pressured to borrow the total amount offered in your financial aid package. Know that you can always return unused student loan funds if you end up with more than you need.

Try your best to live within your budget, since borrowing more now will result in a higher monthly payment once you graduate. Consider implementing a budgeting method to help you stretch your money further.

Exhausting all federal student loan options before turning to private student loans is best. Federal loans generally provide lower interest rates with access to forbearance, deferment, income-driven repayment (IDR) plans and student loan forgiveness programs.

Most federal loans don’t require a credit check, making them an ideal choice for all borrowers. In contrast, private lenders prefer good to excellent credit and a reliable source of income (or a cosigner who meets this criteria).

Although you can likely borrow more with a private loan versus a federal loan, you could end up buried under an unmanageable amount of student loan debt. And without the assistance from IDR plans and deferment options, you risk defaulting.

Only consider private student loans if you have a significant financial gap. Shop around to find a lender offering low-interest rates and flexible repayment options to reduce the cost of borrowing.

Here are some additional ways to fund your college education while reducing your student loan debt burden.

  • Apply for scholarships and grants: Finding free money for college can take time and effort, but it’s worth it to limit your student loan borrowing. You can apply for full-ride scholarships or use a scholarship search tool to narrow options based on interests and demographics.
  • Get a college job: While juggling classes and work might seem daunting, you could apply for a part-time or flexible college job, or even start a side hustle that works around your schedule.
  • Friends and family: Ask friends and family to contribute to your college education via your 529 plan or through a gifting platform like Ugift or Gift of College.
  • Attend a “no loan college”: More schools are focused on helping students graduate with little to no debt. Check out our guide of 56 “no loan colleges” to get started.

Once you graduate, consider searching for jobs with employers offering student loan repayment assistance to help you pay off your student debt faster. Depending on your occupation and other criteria, you may be eligible to have part or all of your student loan debt wiped clean with a student loan forgiveness program.

Subsidized loans are typically better than unsubsidized ones since you save more money on interest charges. However, not all borrowers are eligible for subsidized loans since you need to demonstrate financial need.

If you don’t qualify for subsidized loans, a federal direct unsubsidized loan is typically better than a private student loan. And, of course, scholarships and grants are the best option since it’s free money you don’t need to repay.

You are not required to repay your subsidized and unsubsidized student loans while enrolled and for six months after dropping below half-time enrollment, leaving school or graduating.

However, making interest-only payments before graduation or paying student loans during the grace period can help reduce your accrued interest. Use our student loan repayment calculator to see how much early payments could save you.

If you struggle to keep up with your student loan payments, consider applying for an income-driven repayment (IDR) plan.

The good news is that there’s no official income limit to qualify for federal financial aid. If you think your parents make too much to receive financial assistance, it’s worth applying anyway. You might be surprised at what you can receive. Plus, it’s free to submit a FAFSA — it costs only a bit of your time.

Keep in mind that you may not be able to receive subsidized federal loans since eligibility is determined by level of financial need. However, you could still receive unsubsidized federal loans, which typically come with lower interest rates than private loans.

Additionally, you could apply for merit-based scholarships, which review your academic performance instead of your financial situation.

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