Federal student loans can help with college costs and subsidized and unsubsidized options. Both have low interest rates, but the main difference is that subsidized loans save you money on interest, as the government pays it while you’re in school. Understanding the difference is key to making the best choice for your situation.
Federal Student Loans
Federal student loans are government-backed financial aid to help students pay for education. They have lower interest rates than private loans and more flexible repayment plans, including forgiveness for eligible borrowers. These loans fill the gap between scholarships, grants, and other financial aid, covering expenses like tuition, fees, living costs, and educational materials. There are two main types: subsidized and unsubsidized. Both offer similar benefits, but the main difference is who pays the interest while you’re in school.
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Subsidized Loans
Subsidized loans are need-based federal student loans where the government pays the interest while you’re in school at least half-time, during your grace period (usually the six months after graduation) and any deferments. Once repayment begins or the loan enters forbearance, you’re responsible for the interest. These loans are offered based on your financial need, as determined by your FAFSA application. The U.S. Department of Education pays the interest during your enrollment in an accredited school, during military service, and for six months after graduation. Subsidized loans can save you money by delaying interest payments, but eligibility is limited to those who demonstrate financial need.
Eligibility Criteria for Subsidized Loans
Subsidized Loan Borrowing Limits
Interest Rates and Fees
Pros and Cons of Subsidized Loans
Government pays interest. The government covers interest while you're in school and during the grace period.
No interest accrual during school. Interest doesn't accumulate while you're in school or on certain repayment plans.
Education Department covers remaining interest. If your payments don't cover the interest, the Department covers the rest.
Eligibility based on financial need. Loan amounts are capped and may not cover all your expenses.
Subsidized loans must be repaid in full. Interest begins accruing once repayment starts.
Late or missed payments impact the credit score. Delayed payments can negatively affect your credit rating.
Unsubsidized Student Loans
Unsubsidized loans are federal loans where you are responsible for paying interest from the start, including while in school, during the grace period, and deferments. Interest begins accruing immediately and can increase your loan balance.
You can pay the interest as it accrues or defer it. However, deferring causes the interest to be added to the principal, potentially increasing your loan by 10-25%.
These loans have a fixed interest rate, so it won’t change over time.
Eligibility Criteria for Unsubsidized Loans
Unsubsidized Loan Borrowing Limits
Interest Rates and Fees
Pros and Cons of Unsubsidized Loans
Available to all students. Unsubsidized loans are not based on financial need, making them accessible to everyone.
Higher borrowing limits. These loans allow students to borrow more compared to subsidized loans.
Fixed interest rates. The interest rate remains the same throughout the loan term, offering predictable repayment.
Interest accrues immediately. Interest starts as soon as the loan is disbursed, making it more expensive than subsidized loans.
Unpaid interest capitalized. Unpaid interest is added to the loan balance, increasing the total debt.
Higher long-term debt. Deferring interest payments increases the debt over time.
Subsidized vs Unsubsidized Student Loans
Subsidized loans should always be your first choice, as the federal government covers the interest that accrues while you’re in school, saving you money. This is especially beneficial for borrowers who can’t afford to make interest payments during their studies.
However, some borrowers may not meet the financial need requirements for subsidized loans, leaving unsubsidized loans as their only option. Although unsubsidized loans do not offer interest coverage, they still have relatively low interest rates and federal protections, including eligibility for income-based repayment plans.
Subsidized loans are less expensive than unsubsidized loans, so accept subsidized loans first before considering unsubsidized options. Even if you borrow the same amount, an unsubsidized loan will cost more in the long run due to the interest that accrues from the start.
If you take out an unsubsidized loan, remember that interest begins accruing immediately. To avoid increasing your loan balance, it’s best to make interest payments while in school. You can also make extra payments or pay off your loan early without penalty, which can help reduce the total amount you’ll owe.
Main Differences between Subsidized and Unsubsidized Loans
How to Apply for Subsidized and Unsubsidized Student Loans
Fill out the FAFSA. The Free Application for Federal Student Aid must be submitted to apply for both subsidized and unsubsidized loans.
Get your financial aid award letter. After submitting the FAFSA, the school’s financial aid office will send a notification with the amount of subsidized and unsubsidized loans you are eligible for.
Accept the financial aid and complete the requirements. After deciding which aid to accept, complete the entrance counseling at studentaid.gov and sign a Master Promissory Note (MPN). Parent borrowers must also sign the MPN.
Note! Take any grants and scholarships offered first, as they don’t need to be repaid. Work-study options should be accepted before taking out loans. Your school will determine your loan eligibility each year.
What to Know about Applying for an Unsubsidized Loan
Subsidized and Unsubsidized Loan Alternatives
Grants and scholarships. Grants and scholarships help reduce the need to borrow for college. Grants are need-based and don’t need to be repaid, while scholarships are often merit-based or awarded based on specific criteria. The FAFSA can help identify eligibility for these funds.
Work-study programs. Work-study provides part-time jobs for students, allowing them to earn money for educational expenses. These need-based programs offer both on-campus and approved off-campus employment opportunities, with payments going directly to the student.
Private student loans. Private student loans, issued by banks or credit unions, are an option if you reach your federal loan limits. However, these loans typically have higher interest rates and fewer repayment protections, so they should be used as a last resort when other options are unavailable.
Unsubsidized Loans vs Private Student Loans
Things to Consider before You Decide
Conclusion
When choosing between subsidized and unsubsidized student loans, the key is interest. Subsidized loans, based on financial need, can save you a lot of interest since the government pays it while you’re in school and during deferment periods. Unsubsidized loans, available to more students, start accruing interest immediately, which can lead to a higher total repayment amount. While both have lower rates than private loans, subsidized loans should be prioritized if eligible, since they reduce your financial burden in the long run.