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The Difference Between Subsidized and Unsubsidized Loans

Student Loans

A college degree seems far in the offing for many high school students without some financial aid. College hopefuls resort to subsidized and unsubsidized loans to cater to their college education. You may end up in more debt if you don't know the type of loan that suits you. We have prepared this write-up that analyses the stark differences between subsidized and unsubsidized loans.

What are Subsidized Loans?

Subsidized loans are undergraduate loans for students who demonstrate financial need. The loan doesn’t accrue interest while you are in school and on deferment periods. The U.S. government pays off the interest, so technically, you pay no interest until six months after graduation. The loan factors in parents’ contributions and other financial aids such as grants. Once you start paying off the interest and the principal, the government stops paying the interest. Federal direct subsidized loans are sometimes called Stafford loans.

What are Unsubsidized Loans

Unsubsidized loans do not have an interest subsidy, and you pay the original loan amount plus interest that accrues on the day the loan is delivered to you. Unsubsidized Loans do not need you to demonstrate financial aid. Graduate and undergraduate students qualify for unsubsidized loans. Unsubsidized loans are available from the government and approved financial institutions.

Subsidized Loans

  • Financial need-based qualifications
  • $3,500 ceiling for the first year
  • Interest doesn’t accrue until after leaving school
  • Undergraduate students only
  • Government pays interest

Unsubsidized Loans

  • No need to demonstrate financial need
  • $5,500 ceiling for the first year
  • Interest accrues from disbursement
  • Graduate and undergraduate students
  • The government does not pay interest

How Much Can I Borrow?

The above table is a general ceiling for what you can borrow for each type of loan. Let’s get into the specifics. After filling out the Free Application for Federal Student Aid form online or submitting a mailed copy, the government will issue you a financial aid package minus the contributions expected from your parents and other grants. For subsidized loans and unsubsidized loans, you have to be eligible. The eligibility criteria for either type of loan are:

  • Have a high school diploma or its equivalent
  • Be a U.S. citizen or non-citizenship eligibility
  • Have a social security number
  • Enroll at least half-time at a school that participates in the Federal Direct Loan program

For subsidized loans, you will have to demonstrate financial need. How you fill out the FAFSA form is critical. Overall, the amount a dependent an independent student can borrow from a subsidized loan is $23,000, 34,500 for unsubsidized loans, and $57,500 aggregate limit for dependent students on unsubsidized and subsidized loans. The factors that drive up or down your loan limit include Parent PLUS loans eligibility and the year of school you are in. Parent PLUS loans have higher limits allowing you to borrow up to the total cost of your study, from tuition to boarding fees. However, they have higher interest rates. You may not qualify for a Parent PLUS loan if you have a $2,000 credit deficit of at least 90 days delinquent. In such a case, you will fail the Parent PLUS credit check, and you can apply for higher amounts of unsubsidized or subsidized loans. Below we break down the loan amounts based on Parent PLUS loan eligibility, student dependency, and year of undergraduate college. The amounts are the loan limits per year.

Dependent Students, except those whose parents can get Parent PLUS loans

  • 1st Year- $5,500 with a $3,500 cap on subsidized loans
  • 2nd Year- $6,500 with a $4,500 cap on subsidized loans
  • 3rd Year- $7,500 with a $5,500 cap on subsidized loans
  • 4th Year- Students considered independent

Independent students and dependent students whose parents can’t get Parent PLUS loans

  • 1st Year- $9,500 with the same $3,500 cap on subsidized loans
  • 2nd Year- $10,500 with a $4,500 cap on subsidized loans
  • 3rd Year- $12,500 with a $5,500 cap on subsidized loans
  • 4th Year- $20,500 in unsubsidized loans only

The laws and aggregate limits change periodically. Stay up to date by visiting the Federal Student Loans Program website.

Unsubsidized and Subsidized Loans Payment and Interest

The only similarity in payment details for the loans is the origination fee at 1.059 %. The differences between unsubsidized and subsidized loans start from the interest accruement period. Immediately, the unsubsidized loan is disbursed to you; it accrues interest at 5.28 %. The government pays interest for subsidized loans while you are in school at least half-time, through approved deferment periods, and six months after graduating. The interest will start to accrue six months after graduating when the government will rescind paying the 3.73% interest for you. The payment plans for subsidized and unsubsidized loans are general federal student loan repayment plans such as:

  • Standard Repayment Plan
  • Graduated Repayment Plan
  • Extended Repayment Plan
  • Revised Pay as You Earn Repayment Plan (REPAYE Plan)
  • Pay as You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)
  • Income-Sensitive Repayment Plan

You can choose income-driven plans also to repay your loan. If you hit a snag in repayment, contact the servicer for forbearance or deferment. Eligible loans are forgiven for income-driven payment plans and through the Public Service Loan Forgiveness Program.

Which Loan Should You Pay First?

According to a U.S. Department of Education Federal Student Aid, 43.4million borrowers have federal student loans. Of these, 55% of the individuals from a four-year institution graduate with $28,400 in college debt. $28,400 is not little money in anyone's books. Knowing which loans to pay first will cut the cost considerably. It is a no-brainer you should pay unsubsidized loans since they accrue interest from the onset. Enjoy the six-month grace period for subsidized loans by paying forts the unsubsidized ones.


If you are eligible for subsided loans, you should save money by applying for them. Unsubsidized loans help you cater to costly college degrees in top institutions. Understanding the differences between subsidized and unsubsidized loans determines what you will pay after college. Beware of predatory lenders who commit usury and defraud students. Rely on sites like ours for detailed and accurate information for your student loan needs. Your student debt plays a crucial role in shaping your financial life. We are your partner for a healthy financial life, from college through to retirement.

Allen Lee

Written by Allen Lee

Allen Lee is a Toronto-based freelance writer who studied business in school but has since turned to other pursuits. He spends more time than is perhaps wise with his eyes fixed on a screen either reading history books, keeping up with international news, or playing the latest releases on the Steam platform, which serve as the subject matter for much of his writing output. Currently, Lee is practicing the smidgen of Chinese that he picked up while visiting the Chinese mainland in hopes of someday being able to read certain historical texts in their original language.

Read more posts by Allen Lee

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