Difference between subsidized and unsubsidized federal student loans

There are many types of loans out there—and sometimes, you’re not sure what you’re eligible for until you receive financial aid offers from individual schools. Keep these definitions in mind from the beginning.

What’s the difference between a subsidized and unsubsidized student loan?

The difference comes down to who is paying the interest that accrues on the loan from the moment you get the money. Both loans have the same interest rate, but whether or not you’re required to pay the interest during the time from disbursement to repayment is the important part.

That’s the “un” part. The “un” will determine the amount of money you’ll end up paying later.

What is a subsidized loan?

A subsidized loan is a type of federal student loan. With a subsidized direct loan, the bank, or the government (for Federal Direct Subsidized Loans, also known as Subsidized Stafford Loans) is paying the interest for you while you’re in school (a minimum of half time), during your post-graduation grace period, and if you need a loan deferment.

You’re effectively getting your responsibility to pay that interest back “waived” with a subsidized loan during those time periods. Once you start repayment, the government stops paying on that interest, and your repayment amount includes the original amount of the loan, and the interest, accruing from that moment.

What is an unsubsidized loan?

Another type of federal loan is an unsubsidized loan. With a federal unsubsidized loan, you are responsible for the interest from the moment the loan money is disbursed into your account. There’s no help on the interest; you’re responsible for the whole amount.

When you start paying back your unsubsidized loans, you’re paying on the original amount and the interest that accrued since the unsubsidized student loan was paid to you. This can, of course, add up to thousands of dollars more to repay over the life of the loan.

So why would anyone ever take out an unsubsidized loan?

Simply put, subsidized loan offers are based solely on need, when you apply for aid through the Free Application for Federal Student Aid (FAFSA), and they are only available to undergraduate students. Generally, you’ll find out how much you’re allowed to borrow on a subsidized loan, for a particular school, via your school’s financial aid offer. Colleges set those amounts individually. If you’re eligible for a subsidized student loan, it will be part of your offer.

On the “un” side, you do not have to demonstrate need for an unsubsidized student loan, so you can borrow more money, and use the funds to pay for a graduate degree, for example. This option will also be in your offer packet, but if you’re eligible for a subsidized loan, I recommend you take that option first.

The FAFSA is key

If you need to take out a loan to make ends meet, know that you’re not alone. College is expensive and no one expects you to have planned for all contingencies. Just be sure to file the FAFSA—it’s the key to all federal financial aid, including college scholarships, college grants, and your eligibility for subsidized and unsubsidized student loans.

For many college students, the reality is that loans are needed to cover some of the costs of schooling. When using loans to cover the college funding gap, many students find that federal loans offer a reasonable solution as a starting point. Because of the low limits presented by federal loans, private loans might also be used to fill gaps.

When starting with federal student aid, however, understanding the difference between subsidized and unsubsidized loans is an important part of the process. The type of loan you get determines how much you owe after graduation. For those who qualify, subsidized loans can mean owing less in interest. 

Here’s what you need to know.

Overview: key differences between subsidized and unsubsidized loans

Subsidized loan vs. unsubsidized loan

How interest accrues on subsidized and unsubsidized loans

The main difference between a subsidized loan vs. unsubsidized loan is who pays the interest while you’re in college. With a subsidized student loan, the government covers your interest costs while you’re in school at least half time. On top of that, the U.S. Department of Education will pay your interest during the six-month grace period after you leave school or drop below half-time enrollment.

On the other hand, with an unsubsidized loan, you’re responsible for the interest on the loan. If you don’t pay the interest on your loan while you’re in school and during the grace period, it accrues. At the end of the grace period, when you start making regular loan payments, any interest that has accrued is added up and then added to your loan balance.

It’s also worth noting that another difference between a subsidized loan vs. unsubsidized loan is that the federal government will cover the interest during a deferment as well. With an unsubsidized loan, even during deferment, the interest will continue accruing unless you make interest payments.

Who qualifies for a Federal Direct Subsidized Loan vs. a Direct Unsubsidized loan?

Because the government is willing to cover interest costs on subsidized loans, it’s important to note that there are more stringent criteria to getting a Direct Subsidized loan vs. Direct Unsubsidized loan:

• Financial need: You must demonstrate financial need in order to qualify for a subsidized loan. Your need is based on how you fill out the Free Application for Federal Student Aid (FAFSA). No matter your financial situation, you can qualify for an unsubsidized loan.
• Undergraduate status: You must be an undergraduate student to qualify for a subsidized federal loan. Graduate students and professional students don’t qualify for subsidized loans, no matter their financial situation. Post-undergraduate students can still get unsubsidized loans, however.
• Lower annual loan limits: Subsidized loans come with lower borrowing limits than unsubsidized loans. If you qualify for subsidized loans and you still have a college funding gap, you can get unsubsidized loans to make up the difference. You can borrow between $5,500 and $7,500 each year, with no more than $3,500 to $5,500 of it being subsidized. However, only the interest on the subsidized portion of your debt will be paid by the Department of Education. The unsubsidized portion of your debt will accrue interest.

Independent students are eligible to borrow higher Federal Direct loan amounts each academic year. There are also special guidelines for students whose parents are not eligible for Parent PLUS loans. For more details, see the StudentAid.gov website.

Note that because of the low aggregate loan limits on federal loans, which are dependent on whether you’re in your first, second or subsequent year at college, you might need private loans to cover the total cost of attendance.

Getting federal student loans

Even though there’s a difference between subsidized and unsubsidized student loans, the process for getting federal loans is the same. 

You start by filling out the FAFSA. Once that’s done, your information is sent to the schools you’re applying for. Each college's financial aid office uses the information in the FAFSA to determine how much aid you qualify for and how much you can borrow for each loan type. 

Your financial aid letter from the school will help you determine whether you qualify for subsidized student loans through the Direct Loan program. The most common type of subsidized loans are Direct Subsidized Loans. Any U.S. citizen can borrow using unsubsidized student loans, most commonly Direct Unsubsidized Loans, so you don’t need a special qualification for that. After you accept your financial aid, funds are sent to the school to cover your costs. Anything left over is sent on to you for use to help pay other costs related to college.

In addition to seeing whether you qualify for subsidized student loans, your FAFSA also helps determine your eligibility for grants. In general, it’s better to accept grants, which is money you don’t have to repay, then accept subsidized federal student loans. If you still need more money to cover your costs, and you don’t have scholarships or savings to help with those costs, an unsubsidized federal loan can potentially make up the difference.

Note that federal loans come with standardized fees and interest rates. You’ll pay a small fee to originate your federal loans, whether they’re subsidized or unsubsidized. On top of that, the interest rate is the same. Interest rates are set each year, based on the U.S. Treasury auctions. Fees and interest rates change each year, and the loans disbursed to you each year are subject to the current year’s rate. The rate remains fixed for the life of your loan. As a result, it’s possible to have a variety of interest rates, depending on when your loan was disbursed.

Federal student loans vs. private student loans 

In general, even with the difference between subsidized and unsubsidized student loans, borrowers should attempt to exhaust federal aid before turning to private student loans. Federal loans come with certain protections and repayment options, including income-driven repayment plans and hardship deferrals/forbearance, that private loans don’t have.

Additionally, private loans can sometimes have higher interest rates and you need to meet credit criteria. There are no credit criteria for subsidized and unsubsidized student loans. However, for those who have good credit, above 650, or who can get a cosigner, private loans could potentially have lower interest rates. On top of that, private loans don’t usually come with origination fees like federal loans do. The loan limits are also higher with private loans, which can help you cover the total cost of attendance.

For the most part, it makes sense to take scholarships and grants, then turn to subsidized federal loans and then go to unsubsidized federal loans. After hitting federal loan limits, you can turn to private student lenders, like those available through Juno, to bridge the gap to cost of attendance.

Later, if you know that you won’t qualify for some of the federal protections, it can make sense in some cases to refinance your federal student loans to private loans to help you lower your overall interest rate and reduce your repayment time. Juno offers a unique negotiated offer with lenders and that can be a way for you to get more bang for your refinance buck.

Bottom line

If you can qualify for a subsidized loan vs. unsubsidized loan, you could save money on interest and reduce what you owe for school. Understanding the difference between subsidized and unsubsidized student loans can make a difference in what you ultimately end up paying for college. Organizations like Juno, which negotiates deals with private lenders, can further help you get lower rates and fill college funding gaps if you have good credit. 

Juno can help you to find a student loan or refinance a loan at the most competitive possible rate. We get groups of buyers together and negotiate on their behalf with lenders to save them money on private student loans and private student loan refinance loans. 

Join Juno today to find out more about your options for affordable private student loans to help fund your degree.

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