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

Quick Answer

The primary difference between subsidized and unsubsidized student loans is who is paying the interest that accrues while an undergraduate is in school and during future periods of deferment.

A college student wearing a yellow shirt studies in the library.

If you're a college student, federal student loans can help you afford to pay for college. Depending on your situation, you may have access to subsidized and unsubsidized student loans.

There are key differences between these two types of federal loans, including who's eligible, how the interest works and how much you can borrow. If you have access to both, it's a good idea to maximize subsidized loans before using unsubsidized loans, and here's why.

What Is the Difference Between Subsidized and Unsubsidized Loans?

There are a few significant differences between subsidized and unsubsidized loans.

Subsidized Loans Unsubsidized Loans
Who qualifies Undergraduate students who exhibit financial need Undergraduate, graduate and professional students and parents, regardless of need
Loan amounts Up to $5,500 per year Varies by loan type
How interest works The federal government pays interest that accrues during periods of deferment The borrower is responsible for paying interest that accrues during periods of deferment

Subsidized Loans

Subsidized loans are designed to help undergraduate students with financial need, which is determined by the student's Free Application for Federal Student Aid (FAFSA).

With these loans, the federal government pays any interest that accrues while the student is in school at least half-time, during the six-month grace period after they leave school and during future periods of deferment.

The maximum amount you can borrow depends on which year of school you're in:

  • First year: Up to $3,500
  • Second year: Up to $4,500
  • Third and fourth years: Up to $5,500

Unsubsidized Loans

Unsubsidized student loans are the standard federal loans that both students and parents can take out to pay for school. With these loans, the borrower is responsible for any interest that accrues, regardless of the status of the loan.

If you're an undergraduate student, the amount you can borrow depends on whether you're a dependent or independent student, as well as on which year of school you're in. Additionally, if undergraduate students qualify for both subsidized and unsubsidized loans, the loan limit includes both.

Annual Maximum Unsubsidized Loan Limits for Undergrads
Year in School Dependent Students Independent Students
First year $5,500 $9,500
Second year $6,500 $10,500
Third and fourth years $7,500 $12,500

If you're a graduate or professional student, you can borrow up to $20,500 in direct unsubsidized loans, but if that's not enough, you can borrow up to the total cost of attendance for your school, minus other financial aid received, with direct PLUS loans. Parents also have access to PLUS loans.

Should I Use Subsidized or Unsubsidized Student Loans?

If you qualify for subsidized student loans based on your financial situation, you'll save a lot of money by opting for those instead of unsubsidized loans.

This is because the interest that accrues on your unsubsidized loans gets capitalized and added to your loan balance shortly before you begin repayment. In other words, you'll essentially pay interest on that interest, as well as on your original loan balance.

Many undergraduate students may need to rely on both subsidized and unsubsidized loans to fund their college education. If this is the case for you, one way to avoid interest capitalization is by paying off the interest as it accrues.

How to Qualify for Subsidized and Unsubsidized Student Loans

College students and their parents must fill out the FAFSA each year to be eligible for federal student loans. Your school's financial aid office will then take the information in the application, including your and your parents' financial details—if you're still considered to be dependent on them—to determine your eligibility for subsidized loans.

If you're not eligible for subsidized loans, you should be eligible for unsubsidized loans, as long as you meet other eligibility criteria, including:

  • You're a U.S. citizen or an eligible noncitizen.
  • You have a valid Social Security number (with the exception of students from the Republic of the Marshall Islands, Federated States of Micronesia or the Republic of Palau).
  • You're enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program.
  • You're enrolled at least half-time.
  • You've maintained satisfactory academic progress in college or career school.
  • You sign the certification statement on the FAFSA stating that you're not in default on a federal student loan, you do not owe money on a federal student grant and you'll only use federal student aid for educational purposes.
  • You can show that you're qualified to obtain a college or career school education.

Remember, there are limits on how much you can borrow with each loan type, so you'll also have to keep that in mind as you figure out where to get funding to pay for school.

How to Repay Subsidized and Unsubsidized Student Loans

You can technically start making payments on either type of student loan as soon as you'd like. But you generally don't need to as long as you're enrolled at least half-time. There's also a six-month grace period after you graduate, leave school or fall below half-time status. After that, you'll start making equal monthly payments over the 10-year standard repayment plan.

If you need to, you can look into other repayment plans: The Education Department offers extended repayment plans that go as long as 30 years, a graduated repayment plan where payments start out low and increase over time, and also income-driven repayment plans that reduce your payment to a percentage of your income.

Before you start paying your student loans, consider your situation and research your options to determine the best approach for you.

Monitor Your Credit While Paying Student Loans

Student loans don't have much of an impact on your credit score until you start making payments. But for many college graduates, student loans may be their first step into the credit world and can have a major impact on their credit history.

As a result, it's crucial that you make your payments on time every month to establish a positive credit history. Also, you can use Experian Go™ to access other resources and guidance on how to build your credit history. You'll also be able to monitor your progress and manage your credit file as it grows over time.