Student loans come in a dizzying variety of loan types, and making sense of them isn’t always easy. When it comes to Federal Direct loan programs, it’s important to note that student loans fall into two main categories — subsidized and unsubsidized.
These two categories are critical to understand because the difference between them has a big impact on the amount of interest a borrower ends up paying.
Borrowers who qualify for subsidized loans will pay less in interest over time, while borrowers who take out unsubsidized loans will owe more. Another key difference between subsidized and unsubsidized loans is that subsidized loans are need-based, while unsubsidized loans are available to all students, regardless of need.
If you meet the requirements for a subsidized loan, consider using that loan type before an unsubsidized loan to lower your future debt.
Unsubsidized vs. Subsidized Student Loans
When considering a subsidized or unsubsidized loan, the key differences are the interest, loan limit, and eligibility.
Subsidized Loans are Less Expensive
Federal subsidized student loans are less “expensive” in the long run than unsubsidized loans. Interest starts accruing sooner with an unsubsidized loan, meaning you add more to your balance from the beginning. You’re responsible for the interest that accrues on unsubsidized student loans during in-school and grace periods, as well as deferments and forbearances. Borrowers can choose to pay interest as it accrues or defer paying the interest until the student loans enter repayment. All federal student loans have a fixed interest rate.
If you don’t pay the interest as it accrues, the interest will capitalize and be added to the principal loan balance. That means that your interest would accrue interest of its own. This can increase the size of your loan by as much as 10-25%.
However, with a subsidized student loan, the government pays the interest during the time when an eligible borrower is in school (at least half-time), during the six-month grace period after graduation, and during authorized deferment periods.
The federal government also pays the accrued-but-unpaid interest on subsidized student loans during the first three years of certain loan repayment plans. That includes income-based repayment (IBR), pay-as-you-earn (PAYE) and revised pay-as-you-earn (REPAYE) plans, but not the income-contingent repayment (ICR) plan.
So Why Would You Get an Unsubsidized Loan?
One benefit of unsubsidized loans is they’re available to a wider range of students. Subsidized loans are awarded based on financial need. Unsubsidized loans don’t have this requirement, so ff you don’t meet qualifications to be eligible for need-based loans, you can still apply for an unsubsidized loan.
Because you will pay more in interest for an unsubsidized direct loan, you should borrow subsidized direct loans first if you meet the financial need requirements. However, not all borrowers are eligible for subsidized loans, and the amount you can borrow is limited per academic year.
Key Differences Between Subsidized and Unsubsidized Loans
Interest while in school
Paid by federal government
Interest during grace period
Paid by federal government
Interest during deferment
Paid by federal government
Interest during forbearance
Based on financial need
Not based on financial need
Undergraduate students only
Undergraduate studentsGraduate studentsProfessional degree students
Total loan limit for entire education
$31,000 for dependent undergraduate students$57,500 for independent undergraduate students$138,500 for graduate students
Examples of Unsubsidized Student Loans
Unsubsidized loans include the Direct Unsubsidized Loan, the Federal Grad PLUS Loan, the Federal Parent PLUS Loan, private parent loans, and loans that consolidate and refinance these loans.
Private student loans and parent loans give borrowers more options than unsubsidized federal loans for making payments on student loans during the in-school and grace periods. The most common options are full deferment of principal and interest, interest-only payments, and immediate repayment of principal and interest.
Federal student loans provide for full deferment during the in-school and grace periods. An immediate repayment is an option on federal parent loans. There are no prepayment penalties on federal and private loans, so nothing stops a borrower from making interest-only or fixed payments on unsubsidized loans that don’t offer these options.
Eligibility for Unsubsidized Student Loans
Eligibility for an unsubsidized student loan does not depend on financial need, so even wealthy students may qualify for an unsubsidized student loan. Typically, more students will qualify for an unsubsidized student loan than for a subsidized student loan.
To qualify for an unsubsidized loan, the borrower must meet the following requirements:
- Be enrolled at least half-time as a regular student at a college or university that is eligible for federal student aid. Some private student loans will lend to continuing education students who are enrolled less than half-time. For federal student loans and most private student loans, repayment begins six months after the borrower graduates or drops below half-time enrollment.
- Have a high school diploma, GED, or the equivalent (e.g., fulfilling state requirements for homeschool students).
- Be a U.S. citizen or permanent resident (for federal loans). Some private student loans will lend to international students if the borrower has a creditworthy cosigner who is a U.S. citizen or permanent resident.
- Be in good academic standing with at least a 2.0 grade point average (GPA) on a 4.0 scale.
- Make progress toward graduating within 150% of the normal timeframe for your degree. So if you’re in a four-year degree program, you’d need to complete the degree within six years to qualify.
The borrower must not be in default on a previous student loan. Also, most private student loans will require a credit check and a creditworthy cosigner.
Loan Limits on Unsubsidized Student Loans
Unsubsidized loans generally allow higher loan limits than subsidized loans, letting students borrow more money.
An independent undergraduate student will qualify for a higher loan limit than a dependent undergraduate student on an unsubsidized federal student loan. Dependent undergraduate students may qualify for the same limits as independent students if their parent was denied a Federal Parent PLUS Loan due to an adverse credit history.
Federal student loans have an annual loan limit per academic year, and an aggregate loan limit, which is the total amount a student can borrow for their education.
How to Apply for an Unsubsidized Student Loan
There are three main steps to applying for an unsubsidized student loan. Those three steps are:
Step 1: Federal student loans require the student to have filed the Free Application for Federal Student Aid (FAFSA), even for unsubsidized loans. You do not need to complete the FAFSA to apply for a private student loan.
Step 2: After submitting the FAFSA, the college financial aid office will send the student a financial aid award letter or notification. This will specify the amount of subsidized and unsubsidized federal student loans for which the student is eligible.
Step 3: The student will need to complete entrance counseling at studentaid.gov and sign a Master Promissory Note (MPN). Parent borrowers will also need to sign an MPN.
What to Know About Applying for an Unsubsidized Loan
If the student is a first-time, first-year borrower, there may be an automatic 30-day delay before the federal student loans are disbursed.
Funds will be credited to the student’s account at the college and applied first to tuition and fees. If the student will be living in college-owned or operated housing, the funds will also be applied to room and board. A credit balance will be refunded to the student within 14 days to pay for other college costs.
Students and parents can apply for private student loans and private parent loans through the private lender’s website.
Strategy for Subsidized vs. Unsubsidized Student Loans
Subsidized student loans are less expensive than unsubsidized student loans, so borrowers should prefer subsidized student loans to save money. Your loan payments with unsubsidized loans include interest that built up during years in school, so you start out with a higher balance than borrowing the same amount through a subsidized loan.
However, borrowers might not be able to cover all college costs with just subsidized loans, especially at higher-cost colleges. Also, graduate students are no longer eligible for subsidized loans.
If a borrower has both subsidized and unsubsidized student loans, it is best to make extra payments on the unsubsidized loans, since this will save the money if the borrower ever needs a deferment.
The Bottom Line
An unsubsidized loan, which most student loan borrowers end up receiving, is a loan where the interest isn’t paid while you’re in school. Instead, the loan interest accumulates and compounds on top of the original loan balance. Borrowers should be careful about these types of loans because they can become expensive even before you enter a repayment period.
Frequently Asked Questions (FAQs)
Are unsubsidized loans good?
Unsubsidized loans are not the worst loans you can borrow in terms of pure cost and the interest rate that you’ll receive. However, the interest accumulates and compounds on top of your loan balance even before you hit repayment. This means you should be mindful of how much you’re borrowing and what you’ll need to repay.
Do you pay back an unsubsidized loan?
Yes, you will always repay an unsubsidized loan. It is a federally-backed loan that goes into repayment when you graduate, start attending school less than half-time, or leave school. When one of those things is triggered you’ll receive a 6-month grace period to prepare for repayment.
Is it better to accept subsidized or unsubsidized loans?
It’s typically a best practice to accept subsidized loans first because there won’t be as much interest to repay on those loans compared to unsubsidized loans. It’s best to only accept as much as you actually need to attend school and to find ways to pay for the rest of your expenses.