Which to Borrow: Subsidized vs Unsubsidized Student Loans

To qualify for subsidized loans, you must demonstrate financial need, which is determined through the Free Application for Federal Student Aid. The form asks for information about your financial situation, and your responses are used to calculate your eligibility for federal aid, including subsidized loans. Only undergraduate students enrolled at least half-time are eligible for these loans. Also, first-time borrowers on or after July 1, 2013, can borrow up to 150% of the published length of their academic program - this is typically six years for a four-year program or three years for a two-year program. Your financial need, as calculated by your FAFSA, is a key factor in qualifying for subsidized loans.

The amount you can borrow in subsidized loans depends on your financial need, as determined by your FAFSA, and the federal loan limits. Typically, annual loan limits for subsidized loans are lower than those for unsubsidized loans. For instance, a first-year dependent undergraduate student can borrow up to $3,500 in subsidized loans, while the unsubsidized loan limit is $5,500. The total subsidized loan limit for your entire undergraduate education is $23,000. The exact amount you can borrow is also determined by your school, based on these federal guidelines and your financial need.

Subsidized loans have a fixed annual interest rate for each year, set by Congress. The current rate for undergraduate loans is 6.53%. The fee may vary as the U.S. Department of Education adjusts it annually; usually, it’s about 1-2%. Interest doesn’t accrue while you’re enrolled at least half-time in college, as the U.S. Department of Education pays it during this period. The government continues to pay the interest during the grace period (the six months after graduation) and during deferment, which allows you to temporarily pause payments. Once you enter repayment or the loan goes into forbearance, you’ll be responsible for paying the interest.

• Financial need. Unsubsidized loans do not require you to demonstrate financial need. You will still need to complete the FAFSA to determine eligibility for federal financial aid.

• Eligible students. Undergraduate and graduate students can borrow unsubsidized loans as long as they are enrolled at least half-time in an eligible program at a college or university.

• Academic standing. You must be in good academic standing, typically with a GPA of at least 2.0 on a 4.0 scale.

• Progress toward a degree. You must be making satisfactory progress toward graduation, typically completing your degree within 150% of the normal timeframe (e.g., within six years for a four-year program).

• Previous loans. You must not be in default on any previous federal student loans.

• Undergraduate limits. Dependent undergraduate students can borrow up to $31,000 in unsubsidized loans for their entire education, independent undergraduate students can borrow up to $57,500.

• Graduate limits. Graduate students (considered independent) can borrow up to $138,500 in unsubsidized loans for their education.

Federal student loan interest rates are set by Congress each spring based on an economic index and apply to loans disbursed between July 1 and June 30 of the following year. Undergraduate students have a 6.53% interest rate, graduate and professional students 8.08%, and Direct PLUS Loans for parents of dependent undergraduate students and graduate or professional students 9.08%. There are also fees: 2.05% for undergraduate students, 3.60% for graduate or professional students, and 4.60% for parents of dependent undergraduate or professional students.

Interest begins accruing as soon as the loan is disbursed, even while the student is in school. Although loan payments are not required during the first six months after graduation, interest continues to accrue during this grace period. The accrued interest will then be capitalized, meaning it will be added to the principal loan balance, increasing the amount to be repaid and resulting in more interest paid over time. Interest also continues to accrue during periods of deferment and will be added to the loan balance.

• Interest while in school. The federal government pays interest on subsidized loans, and the borrower pays interest on unsubsidized loans. 

• Interest during the grace period. The federal government pays interest on subsidized loans, the borrower pays interest on unsubsidized loans.

• Interest during deferment. The federal government pays interest on subsidized loans, the borrower pays interest on unsubsidized loans.

• Interest during forbearance. The borrower pays interest on both subsidized and unsubsidized loans.

• Eligibility. Subsidized loans require financial need; unsubsidized loans do not.

• Eligible borrowers. Subsidized loans are for undergraduates only; unsubsidized loans are for undergraduates, graduates, and professional students.

• The total loan limit for the entire education. Subsidized loans up to $23,000; unsubsidized loans up to $31,000 for dependent undergraduates, $57,500 for independent undergraduates, and $138,500 for graduate students.

• 30-day delay. First-time, first-year borrowers may experience a 30-day delay before federal student loans are disbursed.

• Use of funds. Loan funds are applied to the student’s college account, first covering tuition and fees. If the student lives in college housing, the funds will also cover room and board. Any remaining credit balance is refunded within 14 days.

• Private loans. Students and parents can apply for private loans directly through a private lender’s website.

• Borrow wisely. Don’t borrow more than you’ll earn in your first year after graduation to make repayment manageable.

• Start with federal loans. Always use federal student loans first, as they have lower interest rates, more flexible repayment options, and borrower protections than private loans.

• Private loans require a co-signer. Private student loans are credit-based and often require a co-signer, someone who will be responsible for the loan if the borrower doesn’t have a credit history.

• Higher costs and limited options. Private loans often have higher interest rates and fewer repayment or forgiveness options than federal loans.

• Use private loans for gaps. Consider private student loans only if federal loans don’t cover your full college costs. Always compare interest rates, repayment terms, and forbearance options before borrowing.

• Financial need. If you show financial need, you may qualify for need-based grants and subsidized loans, which have lower interest rates and don’t require you to pay interest while in school.

• Academic performance. Good academic performance can help you earn merit-based scholarships, reducing the amount of loans you need to take out and your financial burden during and after college.

• Future earning potential. If you’re pursuing a high-paying career, managing student loan debt may be more manageable. However, minimizing your debt will still allow you to keep more of your future income and reduce long-term financial stress.