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Difference Between Subsidized and Unsubsidized Loans: Everything Explained

Written by Pareeshti Rao

It all started with an impulsive urge to befriend Enid Blyton and be a part of the famous five! Writing since then has been my magic wand and I've used it to sprinkle words like fairy dust and express myself thereat.

May 28, 2021

It is quite common for students to get confused between choosing a subsidized loan vs an unsubsidized loan. While some say subsidized loans are better and more convenient, unsubsidized loans have their set of benefits too! You must be filling out your application form and dreaming of a big future ahead! Education loans contribute majorly to a vast majority of students funding their college education. That is when your knowledge of subsidized vs unsubsidized student loans plays a key role in helping you decide your college financing. This article contains everything you need to know the difference between subsidized and unsubsidized loan. 

What Is A Subsidized Loan?

Most subsidized loans are offered to undergraduate students who demonstrate financial needs. Unlike other loans, this type of loan doesn’t accrue interest because the government temporarily covers the interest costs. Also known as a direct subsidized loan, to qualify for such loans, you must fill out the Free Application for Federal Student Aid (FAFSA).

What Is An Unsubsidized Loan?

An unsubsidized loan on the other hand is a type of federal student loan where you will have to pay the interest on the loan as soon as it is funded. To qualify for an unsubsidized loan, you do not need to demonstrate any financial need, and your school will determine the amount for which you qualify based on the cost of attendance along with other scholarships and aid you have received.

Subsidized Loan Vs Unsubsidized Loan: Key Differences

Both subsidized and unsubsidized loans are offered through the federal government, but there are some key differences between them.

  • Subsidized loans are only available to undergraduate students, while unsubsidized loans are open to undergraduates, graduates, and those seeking professional degrees.
  • Subsidized loans require students to demonstrate financial need, while unsubsidized loans do not. Because subsidized loans are intended for students who need greater financial assistance, they come with additional financial perks.
  • With subsidized education loans, the federal government pays the interest that accrues while the student is enrolled in school at least half time, during the six-month grace period after the student leaves school, and during loan deferment.

Unsubsidized loans, on the other hand, begin accruing interest immediately. Interest that is not paid before the grace period or loan deferment period ends will be capitalized and will then accrue additional interest. 

These two loans do have some things in common, though. Neither requires a credit check, and the interest rate is the same on subsidized and unsubsidized loans for undergraduate students.

To sum it up in a table, when you’re looking at subsidized loan vs unsubsidized loan; here’s what you’ll need to take note of:

ParticularsSubsidized LoansUnsubsidized Loans
Eligible studentsUndergraduatesUndergraduates and graduates
Financial need requiredYesNo
Interest subsidized during defermentsYesNo
Borrowing amount limitsLowerHigher

Direct Subsidised And Direct Unsubsidised Loans

As we pit the difference between a subsidized loan vs an unsubsidized loan, here’s what you need to know about each.

  • What are direct subsidized loans?
  • What are direct unsubsidized loans?

Direct Subsidised Loans: The government pays interest on a subsidized loan while you’re enrolled in school at least half the time. If you’ve already graduated and put your loans into deferment or forbearance, the government also covers interest on your subsidized loans. While students are not required to pay interest on a direct loan while in school, interest begins to accrue immediately.

Direct Unsubsidized Loans: They are also federal loans. However, eligibility for direct unsubsidized loans isn’t based on financial need, and students are responsible for the interest on direct unsubsidized loans, even while you’re in school or while your loans are in deferment after graduation. If you don’t make interest payments, the unpaid interest is added to your loan balance, making repayment more costly.

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Subsidized Loan Vs An Unsubsidized Loan: Which To Repay First? 

When prioritizing loan repayments, it’s a good idea to repay your direct unsubsidized loans first before paying back your direct subsidized loans. Because an unsubsidized loan continues accruing interest while in school, the balance of your unsubsidized loans will be larger unless you paid the interest while in school.

Not only could you save on interest by paying the loan with the higher balance first, but repaying your direct unsubsidized loans first means that if you go back to school or otherwise qualify for deferment or forbearance, you won’t have as much unsubsidized debt for interest to grow.

How Much Can You Borrow?

The school’s cost of attendance limits the amount you can borrow for subsidized and unsubsidized loans. There are also federal student loan limits on how much you can borrow. Overall, the total amount of subsidized loans dependent and independent students can borrow is $23,000. The total amount of unsubsidized loans that independent undergraduate students can borrow is $34,500. So when you’re looking at a subsidized loan vs an unsubsidized loan in terms of borrowing, the latter has an upper hand.

Final Note

The most notable difference between subsidized and unsubsidized student loans is who pays the interest. Due to the interest being paid on subsidized loans by the U.S. Department of Education in some periods, it makes wise financial sense to borrow the maximum amount you are eligible for. Refinancing is a beneficial option to save money in most cases, whether you have subsidized or unsubsidized loans.


1. Subsidized vs Unsubsidized loans: Which is better?

Subsidized loans are the safest initial option for borrowers since the federal government pays the interest on your loans, leaving you with less money to spend out of your pocket. However, some borrowers are unable to establish the financial necessity required to qualify for this type of loan, leaving unsubsidized loans as their sole alternative.

2. Why should subsidized loans instead of unsubsidized loans be your first choice if you qualify?

The biggest catch with applying for an education loan to study abroad is deciding between a subsidized vs an unsubsidized loan. However, given that you can save up more money on interest with subsidized loans in comparison, students usually opt for them over unsubsidized loans if they qualify.

3. Are subsidized and unsubsidized loans eligible for loan forgiveness?

PSLF is accessible through several subsidised and unsubsidized student loans. Any outstanding student loan debt after 120 eligible payments is forgiven tax-free under PSLF. To be eligible for PSLF, you must be on a qualified repayment plan. Borrowers must complete the PSLF Forgiveness Application.

4. Do subsidized or unsubsidized loans have higher interest?

Interest does not accrue on subsidised loans while you are enrolled at least half-time or during deferral periods. Unsubsidized loans are available to both undergraduate and graduate students and are not based on financial need. They have a higher interest rate.

Thank you for reading this blog on Subsidised Loan Vs An Unsubsidised Loan. If you wish to read more, these blogs might be of interest to you:

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