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

The U.S. Department of Education issues several types of federal student loans through the William D. Ford Federal Direct Loan Program, or simply the direct loan program. Two of these are direct subsidized loans and direct unsubsidized student loans.

Direct subsidized loans are only available to eligible undergraduate, community college, trade, career or technical school students, while direct unsubsidized student loans may be offered to graduate students as well.

There are also several other types of direct loans:

We’re going to delve into direct subsidized and direct unsubsidized student loans, the differences between the two and when one type of loan may be better than the other.

What is a direct subsidized loan?

What is a direct unsubsidized loan?

Comparing subsidized and unsubsidized direct loans

What about other types of student loans?

Which type is right for you?

Direct subsidized loans also have a $23,000 aggregate loan limit along with annual loan limits:

Your school will determine your loan offer. At most, you may be offered direct subsidized loans for the greater of your annual loan limit or your financial need amount, which is the difference between your COA and EFC.

Since your COA and EFC may change from one year to the next, your eligibility for direct subsidized loans and your loan offer amount may also vary.

You also can’t borrow direct subsidized loans for longer than one-and-a-half times your programs length. For example, if you’re in a two-year associate degree program you can only take out direct subsidized loans for up to three years. If you later switch to a four-year bachelor’s degree program, your timeline increases to six years, but the direct subsidized loans you previously took out still count against that limit.

Like with direct subsidized loans, there’s no credit or minimum income requirement for direct unsubsidized student loans. Unlike direct subsidized loans, they aren’t need-based, and you may be able to borrow an unsubsidized loan even if you don’t have financial need. However, your school still determines your loan offer amount, which may depend on your COA and EFC.

Borrower’s status

Annual loan limit

Aggregate loan limit

Dependent undergraduate students

$5,500 for your first year$6,500 for your second year$7,500 for your third and subsequent yearsThe limit includes your subsidized loans.

$31,000The limit includes up to $23,000 in subsidized loans.

Independent undergraduate students Dependent undergraduate students after a parent applies and is denied for a PLUS Loan

$9,500 for your first year$10,500 for your second year$12,500 for your third and subsequent yearsThe limit includes your subsidized loans.

$57,500The limit includes up to $23,000 in subsidized loans.

Graduate and professional students

$20,500

$138,500 The limit includes up to $65,500 in subsidized loans. This limit also includes any federal loans obtained during undergraduate study.

There are also a few differences between subsidized and unsubsidized loans. In addition to the need-based requirement for subsidized loans and the varying loan limits, the primary difference is right in the name — the subsidy.

With direct subsidized loans, the education department will pay the interest that accrues on your loan while you’re enrolled at least half time in school and during your loan’s grace period (the six months after you leave school).

With a direct unsubsidized loan, the interest will begin to accrue once the loan is disbursed (the money is sent to your school). Because there’s no subsidy, the interest will continue to accumulate if you defer your payments while you’re in school, during a grace period or if you temporarily stop making payments by placing the loan in deferment or forbearance.

Once you begin making payments, the interest will be added to your loan’s principal balance (i.e., the interest will be capitalized). Now, your interest rate will apply to a larger loan balance, and your loan will accumulate more interest each month.

With a subsidized direct loan, your principal balance will be $5,441 at the end of your grace period since the Department of Education pays the interest. But it would be $6,609 if you had an unsubsidized loan, because the interest will accumulate and capitalize.

If you repay the loan using the standard 10-year repayment plan, you’ll pay approximately $6,941 in total for the direct subsidized loan. By contrast, you’ll pay approximately $8,431 in total for a direct unsubsidized loan—a difference of $1,490 for just one year of school.

Graduate and professional aren’t eligible for subsidized loans and will receive a higher interest rate on their unsubsidized loans.

Subsidized vs. unsubsidized student loan

Loan type

Borrower type

Interest rate

Disbursement fee

Subsidized

Undergraduate

5.05%

For loans disbursed from Oct. 1, 2017, to Sept. 30, 2018: 1.066%

For loans disbursed from Oct. 1, 2018, to Sept. 30, 2019: 1.062%

Unsubsidized

Undergraduate

5.05%

Oct. 1, 2017-Sept. 30, 2018: 1.066%

Oct. 1, 2018-Sept. 30, 2019: 1.062%

Unsubsidized

Graduate / professional

6.60%

Oct. 1, 2017-Sept. 30, 2018: 1.066%

Oct. 1, 2018-Sept. 30, 2019: 1.062%

In addition to subsidized and unsubsidized direct loans, students may be eligible for grad PLUS loans or private student loans.

Grad PLUS loans are unsubsidized direct PLUS loans for graduate and professional students. Like other federal student loans, they offer the same fixed interest rate to all borrowers, and charge a disbursement fee that’s taken out of the loan disbursement amount. For grad PLUS loans disbursed from July 1, 2018, to June 30, 2019, the interest rate is 7.60%, a full 1 percentage point higher than unsubsidized student loans.

Unlike with subsidized loans, the education department will review borrowers’ credit reports, and you may not be eligible for a grad PLUS loan if you have an adverse credit history. However, your income and credit score won’t affect your eligibility.

Private student loans are available from a variety of lenders, including banks, credit unions, online-only lenders, states and schools. Private student loans are credit-based loans, meaning your credit history, credit score, income, outstanding debts and other factors may be considered when you apply for the loan.

For undergraduate students who are offered both subsidized and unsubsidized direct loans, starting with a subsidized loan is generally the best option. Although the loan limits are lower than for subsidized loans, the interest rate and disbursement fees are the same and you can save money by avoiding accumulating interest while you’re at school. The subsidy will also help keep your debt from growing if you need to put a loan into deferment in the future.

If you’ve maxed out your subsidized loan limit for the year, in aggregate or due to the time limit, you may still be able to borrow more money with an unsubsidized direct loan. And, if you still have a funding gap, one of your parents may be able to take out a parent PLUS loan or cosign a private student loan for you.

Students who’ve maxed out their unsubsidized loan limits may then want to turn to grad PLUS loans, which don’t have a preset annual or aggregate loan limit.