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Subsidized vs. Unsubsidized Loans: Which Is Better for College Borrowing?

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The federal Direct loan program offers two main types of debt: subsidized and unsubsidized student loans. While all borrowers can get an unsubsidized federal loan, subsidized federal loans are awarded based on need — and they can save you more interest in the long run.

Understanding the differences between subsidized and unsubsidized loans is vital whenever you take on debt to pay for school.

Subsidized vs. unsubsidized student loans: The basics

The government sets the annual and aggregate federal student loan limits, along with fixed interest rates and fees — which apply to both subsidized and unsubsidized loans.

Although the rate will change based on your status (such as undergraduate versus graduate), the Department of Education doesn’t consider your credit history unless applying for a grad PLUS or parent PLUS loan.

What are the main differences between subsidized and unsubsidized loans?

Here’s a breakdown of the key features of each loan type.

Eligible studentsUndergraduates onlyUndergraduate, graduate and professional degree students
Financial requirementsOnly available to those who 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
  • Overall: $23,000
Limit also includes any subsidized loans:
  • First year: $5,500
  • Second year: $6,500
  • Third or more years: $7,500
  • Overall: $31,000
Borrowing limits for independent undergraduate students
  • First year: $3,500
  • Second year: $4,500
  • Third or more years: $5,500
  • Overall: $23,000
Limit also includes any subsidized loans:
  • First year: $9,500
  • Second year: $10,500
  • Third or more years: $12,500
  • Overall: $57,500
Borrowing limits for graduate studentsNot available to graduate students
  • Annual: $20,500
  • Overall: $138,500 (this limit 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 day one, regardless of your enrollment status

What are the main similarities between subsidized and unsubsidized loans?

  • 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.
  • Interest rates: The current interest rate for undergraduate subsidized and unsubsidized loans is 4.99%. The unsubsidized interest rate is 6.54% for graduate students.
  • Loan fees: Both loans have the same fee. For subsidized and unsubsidized federal student loans, the fee charged to the aggregate total was 1.057% for loans disbursed after Oct. 1, 2020, and before Oct. 1, 2022, for example.

How to get subsidized and unsubsidized federal loans

Your first step to getting subsidized and unsubsidized federal loans is to submit the FAFSA. Mark your calendar for upcoming FAFSA deadlines, and try to apply early — funds are limited and are distributed on a first-come, first-served basis.

Aid packages are determined based on your expected family contribution (EFC) and your school’s cost of attendance. The Department of Education will send you a report outlining how much federal aid you can receive. Prioritize any grants and scholarships, since this is free money you don’t need to repay. You might also receive a work-study award, which allows you to work part-time to help fund your education.

Your aid package will also include the total federal loan amount you can borrow, including subsidized and unsubsidized loans. Remember, it’s best to max out subsidized funding first since the government pays 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 typically have lower interest rates and flexible repayment plans.

Most importantly, don’t feel pressured to borrow the total amount offered to you. Try your best to live within your budget, since borrowing more will result in a higher monthly payment once you graduate.

Federal student loans vs. private student loans

Regarding federal versus private student loans, federal loans take the lead. Federal loans generally provide lower interest rates, flexible repayment plans and student loan forgiveness options compared to private loans.

Private student loans often require a cosigner if you don’t have an established credit history. And although you can likely borrow more with a private student loan, doing so might push your debt to an unmanageable level. Without any assistance from income-driven plans or 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 help minimize your overall student loan debt.

Subsidized vs. unsubsidized loans in repayment: Which should you prioritize?

It’s a good idea to repay your Direct unsubsidized loans first before tackling your subsidized loans. Remember, an unsubsidized loan accrues interest while in school; therefore, the balance will be larger unless you make interest-only payments before graduation.

Let’s say you’re an independent undergrad in your fourth and final year of school, and you want to borrow the maximum: $5,500 in subsidized loans and $7,000 in unsubsidized loans at 4.99%.

According to our student loan calculator, not repaying the unsubsidized loan until the conclusion of your grace period would grow your balance by $523. At that point, you’d have to pay interest on the total of $7,523 while your Direct subsidized loans would still be $5,500.

Ultimately, your student loan repayment strategy should focus on repaying the loan with the higher balance, which will likely be the unsubsidized loan. If you return to school later or otherwise qualify for deferment or forbearance, it’ll be a relief not to worry about your unsubsidized debt accruing interest.


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