Subsidized vs. unsubsidized loans: Compare your options

While these federal loan options are similar, subsidized loans offer one major advantage.

By Jennifer Calonia

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Jennifer Calonia is a personal finance writer and editor who was born, raised, and currently resides in Los Angeles. She believes smart money management starts with making financial concepts and advice accessible to the everyday person.

Edited by Alicia Hahn

Written by

Alicia Hahn

Senior Editor

Alicia Hahn is a student loans editor with more than a decade of editorial experience. She has worked with major finance and lifestyle brands including Mastercard, Forbes, Care.com, The Balance, and others. When she’s not working, Alicia enjoys cooking, traveling, watching true crime documentaries, and doing crosswords.

Updated May 28, 2024, 11:18 AM EDT

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Nearly 30% of undergraduates receive some type of federal student loan, according to the latest data from the National Center for Education Statistics. Depending on your situation, you might have access to federal Direct Subsidized Loans or Direct Unsubsidized Loans — or possibly both.

The main difference between subsidized and unsubsidized loans is the qualifying criteria and who is responsible for paying interest after disbursement. The government pays the interest charges on subsidized loans during certain periods, unlike unsubsidized loans. But subsidized loans are only available to undergraduate students who demonstrate financial need, while unsubsidized loans are for all students regardless of their financial situation.

Here’s what you need to know about subsidized vs. unsubsidized loans, eligibility, and how to plan your college financing accordingly.

Subsidized vs. unsubsidized loans key differences

	Subsidized loans	Unsubsidized loans
Who can borrow?	Undergraduates	Undergraduates and graduates
Financial need requirement	Must demonstrate financial need	Don’t need to demonstrate financial need
Interest rate 2023-24	5.50%	5.50% for undergraduates; 7.05% for graduates
Who pays interest	Government pays interest while in school and during a six-month grace period	Borrower pays for all accrued interest
Borrowing limits	Lower loan limits	Higher loan limits
Loan fees	1.057%	1.057%
Repayment	Option to defer payments until six-months after graduation	Option to defer payments until six-months after graduation
Key benefit	The interest subsidy	Loans are more accessible; you can borrow larger amounts

What is a Direct Subsidized Loan?

Direct Subsidized Loans are only available to undergraduate students who’ve shown financial need on their Free Application for Federal Student Aid (FAFSA). If your financial aid package includes subsidized loans, the loan amount offered depends on your school's total cost of attendance and your Student Aid Index (SAI). Your SAI is calculated based on your family’s income, assets, and state of residence.

The biggest advantage of subsidized loans is that the government pays all of the interest that accrues while you’re in school, during your six-month grace period after leaving school, and during any other periods of deferment. The only downsides are that these loans are awarded based on financial-need, so they aren’t accessible to all undergraduate students, and loan amounts are the most limited out of all federal loans (see “Borrowing limits” below).

How financial need is calculated

Your school’s financial aid office will use the information provided on the FAFSA to determine your financial need. Here are the factors they’ll consider:

The school’s total cost of attendance (COA): COA includes tuition, fees, room and board, textbooks, supplies, and other educational expenses.
Your Student Aid Index (SAI): Your SAI is an estimate of what your family could reasonably afford for your education based on total income, assets, and state of residence.

To calculate how much you can receive in subsidized loans, your school will take your SAI and subtract it from the school’s total cost of attendance.

What is a Direct Unsubsidized Loan?

Direct Unsubsidized Loans aren’t need-based, meaning you don’t have to demonstrate financial need on your FAFSA. Instead, you only need to meet the minimum requirements for federal aid to qualify — these include being a U.S. citizen or eligible noncitizen, pursuing an eligible program at least half-time, and maintaining satisfactory academic progress.

The benefit of Direct Unsubsidized Loans is that they offer higher loan amounts compared to subsidized loans. However, the amount you can borrow depends on other financial aid you receive. The downside of unsubsidized loans is you’re responsible for paying 100% of the interest on the loan. You don’t have to pay the interest charges immediately and it will automatically be deferred until you enter repayment — but interest will begin to accrue the moment you receive the loan funds.

How does interest accrual work?

Interest on both subsidized and unsubsidized student loans starts to accrue daily from the date of disbursement. The key difference lies in how this interest is handled:

Subsidized student loans: Students eligible for subsidized loans can benefit from the government paying all of the interest that accrues on the loan while in school, and for the six months after graduation (the grace period). This generous interest subsidy can significantly reduce the overall cost of your loan.
Unsubsidized student loans: Borrowers are responsible for paying all of the interest that accrues on unsubsidized loans from the moment of disbursement. There is an option to pause payments until your six-month grace period ends, but interest will continue to accrue during this time, and it will capitalize once repayment begins. This means the interest will get added to your principal loan balance — and you’ll owe interest on unpaid interest — making repayment more expensive.

Tip:

If you take out unsubsidized student loans, consider making interest-only payments while in school to prevent interest from capitalizing when repayment starts.

Borrowing limits

With both subsidized and unsubsidized loans, your school determines the amount you qualify for, but there are also borrowing limits based on your year in school and student status.

The aggregate subsidized loan limit for your undergraduate studies is $23,000. The aggregate borrowing limit for unsubsidized loans is $31,000 for dependent undergraduate students, $57,500 for independent undergraduates, and $138,500 for graduates and professionals (this includes loans borrowed for undergraduate programs).

Good to know:

The “aggregate limit” is the total amount you’re allowed to borrow while in school. There’s also a cap on how much you’re allowed to borrow each year.

Subsidized loan limits

Year in school	Borrowing limit
Year 1	$3,500
Year 2	$4,500
Year 3 and beyond	$5,500
Aggregate limit	$23,000

Unsubsidized loan limits

Year in school	Dependent undergraduates	Independent undergraduates	Graduate students
Year 1	$5,500	$9,500	$20,500
Year 2	$6,500	$10,500	$20,500
Aggregate limit	$31,000	$57,500	$138,500 (includes undergrad loans)

Repayment plans

When you take out subsidized and unsubsidized student loans, you’re automatically placed on the Standard 10-year repayment plan. Depending on your financial needs, you might consider other plans that offer lower monthly payments. Here are your other options:

Graduated plan: The Graduated Repayment Plan starts with lower monthly payments that gradually increase over 10 years. The plan is usually best for new graduates who expect their income to increase over time.
Extended plan: The Extended Repayment Plan allows for a longer repayment term of up to 25 years. This plan is best for borrowers who need smaller monthly p[ayments spread over a longer period of time. Keep in mind, you’ll owe more interest under this plan.
Income-driven repayment: Income-driven repayment (IDR) plans set your monthly payments based on your income and family size. They’re usually best for borrowers who have a lower income relative to their debt, as they can potentially qualify for loan forgiveness after 10 to 25 years of repayment. IDR plans include Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

Pros and cons

Pros and cons of Direct Subsidized Loans

Pros

Government pays your interest during school and the grace period
Access to income-driven repayment and loan forgiveness
Lowest interest rate out of all federal loans

Cons

Not available to graduate students
You must demonstrate financial need to qualify
You can only borrow up to $23,000 total

Pros and cons of Direct Unsubsidized Loans

Pros

Available to both undergraduates and graduates
Financial need isn’t a requirement
Access to income-driven repayment and loan forgiveness

Cons

Interest starts accruing while you’re in school
You’re responsible for all interest charges
Interest rates are higher for graduate students

Should I borrow subsidized or unsubsidized loans?

If you qualify for both subsidized and unsubsidized federal loans, opt for subsidized loans first to maximize your interest savings. Then, consider unsubsidized loans — followed by private student loans, if necessary — to cover essential education costs.

How do private student loans compare?

When borrowing for college, it’s generally best to opt for federal student loans before private loans. Federal student loans offer many valuable benefits and protections for borrowers, such as low-fixed interest rates, access to income-driven repayment plans, and loan forgiveness options.

However, federal student loans have stricter borrowing limits which may not fully cover all of your educational expenses. If you find that federal unsubsidized and subsidized loans aren’t enough, private student loans can help bridge the gap since they usually cover up to the full cost of your attendance. Keep in mind that private loans are credit-based; so your interest rate will depend on your credit score and income. If you’re a dependent student without income or credit history, you’ll likely need a cosigner to qualify. The interest rate on your loan will then depend on the credit income of your cosigner, usually a parent or family member.

Bottom Line:

Try to maximize all federal subsidized and unsubsidized loan funds available to you before taking out a private student loan.

How to apply for subsidized and unsubsidized loans

To apply for subsidized or unsubsidized federal loans, follow these steps:

Complete the FAFSA: You must submit the FAFSA for each year you need federal aid. You’ll fill out your personal information and financial details (including information from bank statements, tax returns, and other sources of income). If you’re a dependent student, you’ll also need to include a parent’s information.
Review your financial aid package: Once your FAFSA has been processed, your school will send you a financial aid letter. Read through your school’s financial aid options to see if you qualified for subsidized or unsubsidized loans. If you did, you’ll also see the maximum amount offered for each type.
Accept the loans and determine your amounts: You’re not required to accept every loan that’s offered, nor are you required to accept the full amount available. Borrow only what you reasonably need for the school year to avoid taking on needless student loan debt.
Complete loan entrance counseling: If you’ve never received a Direct Loan, you’ll have to complete entrance counseling. It takes about 30 minutes and is designed to help you understand your education charges, ways to pay, and how to prepare for repayment in the future.
Sign your Master Promissory Note: This is the official loan agreement that outlines the details of your loan and repayment expectations.

Once these steps are complete, the loan funds will be disbursed to your school’s financial aid office. Your school will apply the loans directly to any outstanding charges on your account, including tuition, fees, and room and board. Any remaining loan funds will be sent to you to use towards other educational expenses.

Alternative student loans

If you’re not eligible for Direct Subsidized or Unsubsidized Loans, explore other federal loan options, like Direct PLUS Loans. These loans are available to graduates and professionals (grad PLUS loans), as well as parents of dependent students (parent PLUS loans).

If federal loans aren’t an option or you’ve reached the borrowing limit, third-party lenders offer private student loans that can bridge the financial gap. Shop around with a handful of lenders to compare loan features and rates to ensure you find the right one for your needs.

4.84.8

Fox Money rating

Fixed (APR)

4.04% - 15.41%

Loan Amounts

$2,001* to $400,000

Min. Credit Score

Does not disclose

Check Rates

on Credible’s website

View Details

Overview

Ascent offers several unique borrowing options that you don’t typically see with private lenders. In addition to traditional student loans for undergraduate, graduate, and medical programs, college juniors and seniors may qualify for its Outcomes-Based Loan — which doesn’t require established credit or a cosigner. Instead, Ascent reviews alternate factors such as your school, major, and GPA to determine your eligibility.

Ascent also offers a wide range of loan terms and repayment plans to choose from. You may even qualify for its Progressive Repayment plan, which allows you to start with small payments that gradually increase over time. Borrowers who use a cosigner can release them after as few as 12 payments, though international students don’t qualify for this option.

Interest rates

Fixed or variable

Minimum credit score

Does not disclose

Minimum income

Does not disclose

Loan terms

5, 7, 10, 12, 15, or 20 years

Loan amounts

$2,001 minimum up to your school’s annual cost of attendance; lifetime limits of $200,000 for undergrads and $400,000 for graduates

Cosigner release

12 months

Eligibility

Must be a U.S. citizen or DACA student enrolled at least half time at an eligible institution. International students with a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.

4.94.9

Fox Money rating

Fixed (APR)

4.17% - 16.69%

Loan Amounts

$1,000 up to 100% of the school-certified cost of attendance

Min. Credit Score

Does not disclose

Check Rates

on Credible’s website

View Details

Overview

College Ave offers a wide range of in-school loans for nearly every type of degree. There are a number of repayment options, and borrowers can choose a unique eight-year repayment term. Plus, graduate, dental, and medical students receive extended grace periods.

You may get easy funding for multiple years — 90% of undergraduates are approved for additional student loans when they apply with a cosigner. However, it can be difficult to remove a cosigner for your loan later on, as you must complete at least half of your repayment term before becoming eligible. That’s significantly longer than some lenders, which may only require one to two years of payments before releasing a cosigner.

Interest rates

Fixed or variable

Minimum credit score

Does not disclose

Minimum income

Does not disclose

Loan terms

5, 8, 10, or 15 years for most borrowers (law, dental, medical, and other health profession students have up to 20 years)

Loan amounts

$1,000 minimum up to your school’s annual cost of attendance; lifetime limits depend on your degree and credit profile

Cosigner release

Available after more than half of the scheduled repayment period has elapsed and other requirements are met

Eligibility

Must be a U.S. citizen or permanent resident at an eligible institution. International students with a Social Security number and a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.

4.84.8

Fox Money rating

Fixed (APR)

4.24% - 15.61%

Loan Amounts

$1,000 to $350,000 (depending on degree)

Min. Credit Score

720

Check Rates

on Credible’s website

View Details

Overview

Citizens offers a variety of student loan types, including loans for undergraduates, graduate students, and parents. Perhaps the most unique feature of Citizens student loans is the option for multiyear approval. If you qualify, you can apply once and borrow for future years with a more streamlined process that only involves a soft credit inquiry.

Student borrowers can defer payments while in school and for six months after graduating. You can also score a 0.25 percentage point reduction on your interest rate for setting up autopay, as well as an additional 0.25 percentage point loyalty discount if you or your cosigner already have a qualifying account with Citizens.

Interest rates

Fixed or variable

Minimum credit score

720

Minimum income

Does not disclose

Loan terms

5, 10, or 15 years for student loans; 5 or 10 years for parent loans

Loan amounts

$1,000 minimum, up to a maximum of $150,000 for undergraduate and graduate degrees; $250,000 for MBA and law; and $180,000 or $350,000 for health care student loans, depending on the degree type

Cosigner release

36 months

Eligibility

Must be a U.S. citizen or permanent resident enrolled at least half-time in a degree-granting program at an eligible institution. International students can apply with a cosigner who’s a U.S. citizen or permanent resident.

4.34.3

Fox Money rating

Fixed (APR)

4.25% - 15.49%

Loan Amounts

$1,000 up to 100% of school-certified cost of attendance. Student must be listed as the borrower and a parent may cosign.

Min. Credit Score

Does not disclose

Check Rates

on Credible’s website

View Details

Overview

Sallie Mae offers the Smart Option Student Loan for undergraduate students and a suite of loans for graduate students. You can borrow up to your school-certified cost of attendance and apply just once annually to get the funds you need for the entire academic year. Plus, applying for a Smart Option Student Loan with a cosigner may help you get a better rate.

Through Sallie Mae, you can find a variety of loans designed for specific needs, including loans for MBA programs, law school, medical school, and health profession programs.

Interest rates

Fixed or variable

Minimum credit score

Does not disclose

Minimum income

Does not disclose

Loan terms

10 to 15 years for the Smart Option Student Loan; 15 years for law school, MBA, and graduate school loans; 20 years for medical school loans

Loan amounts

$1,000 up to school-certified cost of attendance. Student must be listed as the borrower, and a parent may cosign.

Cosigner release

After you graduate, make 12 one-time principal and interest payments, and meet certain credit requirements

Eligibility

Must be a U.S. citizen or permanent resident enrolled in an eligible program. Noncitizens residing and attending school in the U.S. may qualify by applying with a creditworthy cosigner, who must be a U.S. citizen or permanent resident, and providing an unexpired government-issued photo ID.

4.44.4

Fox Money rating

Fixed (APR)

4.43% - 14.04%

Loan Amounts

$1,000 to $99,999 annually ($180,000 aggregate limit)

Min. Credit Score

Does not disclose

Check Rates

on Credible’s website

View Details

Overview

Powered by Cognition Financial, Custom Choice offers student loans for undergraduate and graduate students starting at $1,000. You can borrow up to $99,999 per year with a total aggregate limit of $180,000.

If you apply with a cosigner, you may be able to release them from your loan after 36 on-time payments. You can also receive a 0.25 percentage point discount on your interest rate by setting up autopay, as well as a 2% reduction of your principal balance after graduating.

Custom Choice doesn’t charge application, origination, prepayment, or late fees. It also lets you pause payments through forbearance if you qualify for its natural disaster or unemployment protection programs.

Interest rates

Fixed or variable

Minimum credit score

Does not disclose

Minimum income

Does not disclose

Loan terms

7, 10, or 15 years

Loan amounts

$1,000 to $99,999 per year (lifetime limit of $180,000)

Cosigner release

36 months

Eligibility

Must be a U.S. citizen or permanent resident at an eligible institution. You must also meet Custom Choice’s underwriting criteria for income and credit, or apply with a cosigner who does. Eligible noncitizens such as DACA residents can also qualify by applying with a cosigner who’s a U.S. citizen or permanent resident.

4.84.8

Fox Money rating

Fixed (APR)

4.50% - 14.22%

Loan Amounts

$1,000 up to cost of attendance

Min. Credit Score

680

Check Rates

on Credible’s website

View Details

Overview

Education Loan Finance (ELFI) is a division of Tennessee-based SouthEast Bank owned by Education Loan Finance, Inc., a non-profit whose mandate is to provide access to higher education. ELFI launched in 2015 and offers undergraduate, graduate, and parent private student loans as well as student loan refinancing.

ELFI student loans and refinance loans are available to residents in all U.S. states including Puerto Rico. Borrowers can benefit from no application, origination, or prepayment fees. ELFI also offers flexible repayment terms and competitive rates, however there’s no cosigner release option and the lender doesn’t offer any discounts.

Interest rates

Fixed or variable

Minimum credit score

680

Minimum income

$35,000

Loan terms

5, 7, 10, or 15 years

Loan amounts

$1,000 - Cost of attendance

Cosigner release

A cosigner may not be taken off a loan, but the borrower can apply for a new loan without their cosigner.

Eligibility

All 50 states as well as Washington DC and Puerto Rico.

4.64.6

Fox Money rating

Fixed (APR)

4.80% - 8.54%

Loan Amounts

$1,001 up to 100% of school certified cost of attendance

Min. Credit Score

670

Check Rates

on Credible’s website

View Details

Overview

INvested is an Indiana company that offers affordable student loans exclusively to state residents. Loans are available to Indiana students and parents who can meet income and credit requirements, or who have an eligible cosigner. Borrowers can borrow as little as $1,001 or as much as the school-certified cost of attendance minus other aid.

INvested provides detailed information on eligibility so borrowers can quickly determine whether to apply for a loan — however, there’s no option to prequalify with a soft credit check. Cosigner release is also available after just 12 on-time payments, considerably shorter than many other lenders.

Interest rates

Fixed or variable

Minimum credit score

670

Minimum income

Does not disclose

Loan terms

5, 10, or 15 years

Loan amounts

$1,001 minimum, up to the school certified cost of attendance

Cosigner release

12 months

Eligibility

Loans are available to Indiana residents only. Borrowers must have a FICO score of 670 or higher, a 30% maximum debt-to-income ratio or minimum monthly income of $3,333, continuous employment over two years, and no major collections or defaults in recent years. Borrowers who do not meet income or credit requirements can apply with a cosigner.

4.84.8

Fox Money rating

Fixed (APR)

5.75% - 8.95%

Loan Amounts

$1,500 up to school’s certified cost of attendance less aid

Min. Credit Score

670

Check Rates

on Credible’s website

View Details

Overview

Massachusetts Educational Financing Authority (MEFA) is a not-for-profit lender that offers low-cost undergraduate and graduate school loans to students nationwide. While only fixed-rate loans are available, interest costs may be lower than what you see with other private loans.

While you can apply with a cosigner to lock in the best rate possible, removing that cosigner later may be tough. Only one repayment plan allows cosigner release, and you must make four years of consecutive on-time payments and meet other credit and income requirements to qualify.

Interest rates

Fixed

Minimum credit score

670

Minimum income

Does not disclose

Loan terms

10 or 15 years

Loan amounts

$1,500 minimum up to school-certified cost of attendance

Cosigner release

48 months

Eligibility

Must be a U.S. citizen or permanent resident, enrolled at least half time at a degree-granting, nonprofit institution, and must maintain satisfactory academic progress. Must have no history of default on an education loan and no history of bankruptcy or foreclosure in the past 60 months. Applicants who can’t meet the minimum credit and income requirements may apply with a cosigner.

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