What’s the Difference between Subsidized and Unsubsidized Student Loans?

The federal government pays the interest on subsidized federal student loans during in-school and grace periods, when the student is enrolled on at least a half-time basis. The federal government also pays the interest during other periods of authorized deferment, such as the unemployment deferment, economic hardship deferment and military service deferment.

The federal government does not pay the interest on unsubsidized loans during a deferment or forbearance and on subsidized loans during a forbearance. This interest will be capitalized by adding it to the loan balance if it is not paid as it accumulates.

About half of new Federal Direct Stafford Loans to undergraduate students are subsidized. When graduate students and parents are included, however, only about a quarter of annual federal student loan volume is subsidized.

Overall, about 30% of federal student loan dollars outstanding are subsidized, but about three quarters of borrowers with student loans outstanding have a subsidized student loan.

Which Student Loans Are Subsidized and Which Are Unsubsidized?

Subsidized student loans include the subsidized Federal Direct Stafford loan and the Federal Perkins loan, as well as the portion of a Federal Direct Consolidation loan that is attributable to a subsidized Federal Direct Stafford loan. Federal Perkins loans lose their subsidized interest benefit when consolidated.

No new Federal Perkins loans have been made since 2017, when the Federal Perkins loan program ended.

Unsubsidized student loans include all other student and parent loans, including unsubsidized Federal Direct Stafford loans, Federal Parent PLUS loans, Federal Grad PLUS loans, private student loans and private parent loans. All parent education loans are unsubsidized.

Who Is Eligible for Subsidized and Unsubsidized Student Loans?

Subsidized loans are awarded based on financial need. Unsubsidized loans are available to all students, regardless of need.

Subsidized loans are available only to undergraduate students. Graduate and professional school students have not been eligible for the subsidized Federal Direct Stafford loan since 2012.

The amount of a subsidized student loan is determined by the college financial aid office, based on the student’s financial need, up to certain annual and aggregate loan limits.

Loan-specific eligibility requirements include:

• The student must be enrolled on at least a half-time basis.
• The student must complete entrance student loan counseling, which is often provided through StudentLoans.gov.
• The student must sign a Master Promissory Note (MPN).

Borrowers must also satisfy the general eligibility requirements for federal student aid, which include:

• The student must be a U.S. citizen, permanent resident or eligible non-citizen.
• The student must have a valid Social Security Number.
• The student must have a high school diploma or GED. Home-schooled students are also eligible, if they have satisfied the state’s requirements for home-schooling.
• The student must enroll or be accepted for enrollment as a regular student in an eligible degree or certificate program at an eligible college or university.
• The student must file the Free Application for Federal Student Aid (FAFSA). Filing the FAFSA is required even if the family wants only unsubsidized loans.
• The student must not be in default on a previous federal student loan or owe a refund on a grant overpayment.
• The student must maintain Satisfactory Academic Progress (SAP). This involves maintaining at least a 2.0 GPA on a 4.0 scale. The student must also pass enough classes to be on track to graduate within 150% of the normal time-frame (e.g., within 6 years for a 4-year program).

Differences in Subsidized and Unsubsidized Student Loan Terms

The federal government pays the interest on subsidized student loans during the in-school, grace and authorized deferment periods.

The federal government also pays the accrued but unpaid interest on subsidized student loans during the first three years of the income-based repayment (IBR), pay-as-you-earn (PAYE) and revised pay-as-you-earn (REPAYE) repayment plans, but not for the income-contingent repayment (ICR) plan.

Loan limits are lower on subsidized Federal Direct Stafford loans. The annual limits are $3,500 for freshmen, $4,500 for sophomores, $5,500 for juniors and $5,500 for seniors, with an aggregate limit of $23,000. The subsidized Federal Direct Stafford loan limits are the same for dependent and independent students. Any amounts that the student does not receive as a subsidized loan can be borrowed as an unsubsidized loan, up to the overall Federal Direct Stafford loan limits.

If a dependent undergraduate student’s parents are denied a Federal Parent PLUS loan because of an adverse credit history, the student becomes eligible for the same Federal Direct Stafford loan limits as independent students. The increase in loan eligibility is limited to unsubsidized Federal Direct Stafford loans; there is no change in subsidized Federal Direct Stafford loan limits.

In addition to the 150% maximum timeframe restriction on eligibility for federal student aid, there is a maximum eligibility period for the subsidized Federal Direct Stafford loan. New borrowers as of July 1, 2013 can receive subsidized loans for up to 150% of the normal timeframe for their degree program. Part-time enrollment counts proportionately against the maximum eligibility period. The student then loses eligibility for further subsidized student loans and the student’s existing subsidized student loans become unsubsidized. This mostly affects students who switch from a longer program to a shorter program.

Other loan terms, such as interest rates and fees, are the same for subsidized and unsubsidized Federal Direct Stafford loans.

Subsidized Student Loans and Deferment Periods

The federal government pays the interest on subsidized loans during deferment periods. This includes the following types of deferments.

• In-School Deferment
• Grace Period Deferment
• Graduate Fellowship Deferment (does not include medical school internships and residencies)
• Rehabilitation Training Program Deferment
• Unemployment Deferment (capped at 3 years total)
• Economic Hardship Deferment (capped at 3 years total)
• Cancer Treatment Deferment
• Military Deferment
• Post-Active Duty Student Loan Deferment

Note that the Cancer Treatment Deferment is unusual in that the federal government pays the interest on both subsidized and unsubsidized loans during this deferment.

Federal Parent PLUS loans may be deferred while the student on whose behalf the loan was borrowers is enrolled at least half-time and for six months afterward. There is no formal name for this deferment, but it is sometimes identified as the Parent PLUS Loan Borrower Deferment.

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.

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.

Key Differences between Subsidized and Unsubsidized Loans

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