Subsidized vs. Unsubsidized Loans: Which One to Choose?

Student loans help those who need help paying for college expenses while pursuing a degree. Both subsidized and unsubsidized student loans can offer lower interest rates and more flexible repayment options than most personal loans.

The key difference between subsidized and unsubsidized student loans has to do with how and who pays the interest. With a subsidized loan, the government covers accrued interest while you're in college. With unsubsidized loans, you must pay the interest yourself throughout your studies. These options also have different eligibility requirements, borrowing limits, and total costs for students.

Understanding Subsidized Student Loans

Subsidized student loans are federal loans designated for undergraduate students with financial need. They cover a range of educational expenses, including tuition, fees, housing, supplies and software, transportation, and more.

The main difference between a federal subsidized and unsubsidized student loan is that the government pays any interest accrued from subsidized federal student loans rather than the student. Interest payments are also not required until six months after graduation or leaving school.

Eligibility Criteria for Subsidized Loans

Not every student has the option to take out a subsidized loan. The federal government will determine your eligibility based on the verifiable information you provide on your Free Application for Federal Student Aid (FAFSA).

You may be eligible for a direct subsidized student loan if:

You're enrolled in school at least half-time.
You demonstrate financial need on your application.

Maximum Borrowing Limits for Subsidized Loans

Subsidized student loans are subject to annual loan limits. The amount you can borrow through subsidized loans depends on your specific situation, including:

The school you attend
Your school year
Your dependency status

The maximum annual borrowing limit for undergraduate students is $23,000 in subsidized loans.

Understanding Unsubsidized Student Loans

Like subsidized loans, unsubsidized student loans can help students cover the costs associated with higher education. The federal government provides unsubsidized student loans to undergraduate and graduate students, but you can also choose to apply for unsubsidized private student loans from a lender such as a bank, credit union, school, or state agency.

With an unsubsidized loan, you are responsible for paying interest as soon as the loan is disbursed, including while in school.

Eligibility Criteria for Unsubsidized Loans

You don't need to prove you have a financial need to qualify for unsubsidized federal or private loans, and they're available to undergraduate, graduate, and professional degree students.

However, there are still eligibility requirements for unsubsidized federal loans. You may qualify if:

You're a U.S. citizen, permanent resident, or eligible non-citizen.
You're enrolled in school at least half-time.
You meet satisfactory academic progress (SAP) requirements.
You have no loan defaults or overdue financial aid payments.

Maximum Borrowing Limits for Unsubsidized Loans

The maximum amount you can borrow through an unsubsidized student loan differs depending on whether you're applying for a federal or private loan.

Federal limits fall between $5,500 and $12,500 for undergraduate students and depend on your school year and dependency status. The annual limit is $20,500 for graduate and professional degree students.

Key Differences Between Subsidized and Unsubsidized Loans

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Interest Accrual Differences

The government pays for accrued interest from subsidized loans, while the student pays unsubsidized loan interest.

All federal student loans, both subsidized and unsubsidized, have a fixed interest rate set by Congress each year. Direct federal student loans for undergraduates disbursed between July 1st, 2024, and July 1st, 2025, have a fixed interest rate of 6.53%.

Impact on Repayment Obligations

Here's a breakdown of your repayment obligations for different types of loans:

Subsidized loans: You'll only pay the accrued interest on your loan after a six-month grace period post-graduation. There's no penalty for postponing repayment until after you graduate.
Unsubsidized loans: You must repay all accrued interest, which begins accumulating the day the loan is disbursed. Postponing repayment until after graduation will result in more interest accumulation and higher payments.

Eligibility and Borrowing Limits

Subsidized loans have stricter eligibility requirements because interest is paid by the government — funded by U.S. taxpayers — while borrowers are in school. You must prove you have a financial need to qualify. These loans are only available to undergraduates, while graduate and professional students can access unsubsidized loans.

There are also tighter borrowing limits on subsidized student loans. Students needing additional funds may need to look into other options, such as unsubsidized federal or private loans.

Subsidized vs. Unsubsidized Student Loans: Pros, Cons, and Best Options

What is the difference between subsidized and unsubsidized student loans, and how do you choose the best option for your situation and needs? Either loan type can help you cover the often-substantial costs of higher education. Still, make sure you understand the borrowing limits, how interest accrues, and loan fees before you agree to borrow money.

When choosing between subsidized and unsubsidized federal and private student loans, consider the following factors:

Whether you can demonstrate a financial need
The school you plan to attend
How long you plan to be in school
How much money you need to borrow
Your future financial goals
Your comfort level and ability to pay down debt

In the vast majority of cases, it's worth applying for subsidized student loans if you're eligible. Not only will you not have to pay interest while in school, but subsidized loans tend to lower overall costs and often have income-based repayment and loan forgiveness options.

Regardless of the loan type, it's essential to implement strategies for keeping your student loans organized to help you pay them off successfully. This can help you save money on interest, reduce financial stress, improve your credit score, and help you save up for big purchases or retirement.

Choose the Right Student Loan Options for You With MoneyAtlas

Higher education can be a great investment in your personal and professional future. For most people, it leads to higher earning potential, better employment opportunities, greater social mobility, and improved critical thinking skills. College is expensive, however, and most students need loans to help cover the costs.

MoneyAtlas is your one-stop shop for financial education and resources on topics like paying for college, managing debt, saving for retirement, and comparing financial products and services like the best personal loans.