Understanding federal student loans: Subsidized vs. Unsubsidized

What is a subsidized student loan?

Subsidized Loans, also known as Direct Subsidized Loans or informally known as Direct Stafford Loans, are student loans that are only available to undergraduates with financial need. Financial need is calculated via the difference between the cost of attendance at a school as well as your Expected Family Contribution. The cost of attendance will vary depending on the school that you go to, but your Expected Family Contribution will not change.¹ When you fill out the FAFSA (Free Application for Federal Student Aid), your financial need will be determined for you. The school you’ll attend determines the amount of money you can borrow for this loan. Subsidized loans usually have lower loan limits than unsubsidized loans, meaning you can’t borrow as much money.

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Direct Subsidized Loans tend to have better terms for those with financial need.² Subsidized loans also are more forgiving when it comes to paying the interest rate on the loan. The government pays the interest rate on the loan while you’re in school at least half-time, for the first six months after leaving school, and during periods of deferment. Deferment is when a borrower temporarily postpones their loans. This is allowed only under certain conditions like unemployment.

What is an unsubsidized student loan?

Unsubsidized loans may also be called Direct Unsubsidized Loans. They are also informally known as Direct Stafford Loans. Unsubsidized student loans are easier to obtain—you can be in undergrad or graduate school, and you don’t need to prove financial need. With an unsubsidized loan, the school you attend determines how much money you can borrow based on your cost of attendance and how much financial aid you are getting outside of the unsubsidized loan.

With an unsubsidized loan, interest begins accruing right when you get the loan. The borrower is responsible for paying the interest even in periods of deferment. If you choose to not pay the interest while you are in school or during deferment, the interest accrues and capitalizes, meaning what you owe is added to the loan. The main advantage of unsubsidized loans is that they provide higher loan limits for borrowers.

Subsidized vs unsubsidized loans: which is better?

Both loans offer students excellent benefits. You can take out both a subsidized and unsubsidized loan together. Both subsidized and unsubsidized loans have the same interest rates. Interest rates on student loans change each year, but the interest rate on loans taken out on or after July 1, 2022, and before July 1, 2023, is 4.99% for undergraduate borrowers. Graduate or professional borrowers, who only qualify for unsubsidized loans, have a 6.54% interest rate for the same disbursement period. The advantage of subsidized loans is that if you need to defer your loan, the government pays the interest on it. However, not everyone can qualify for unsubsidized loans since you need to prove financial need to get them.

How to apply for a federal student loan

To get a student loan, you’ll need to fill out and submit a FAFSA (Free Application for Federal Student Aid) form. The FAFSA will ask you for personal information and financial situation. Make sure you have all the required documentation for the form, such as your Social Security number, your driver’s license, and tax information like tax documents or tax returns. It usually takes people less than an hour to complete their FAFSA.

The U.S. Department of Education reviews each FAFSA. This process takes about three-to-five days. Your FAFSA results will then be sent to your college, and your college will send you a financial aid offer. Your school will provide you with details on how to accept the loan. You can also choose to accept part of the loan instead of the full loan.

Continuing your education is a wise but expensive investment. Fortunately, student loans are there to help you get through it.

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