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Differences Between Subsidized Vs. Unsubsidized Student Loans

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Education is key to making the right choice about paying for higher education. While you’re likely familiar with the two main loan types —federal student loans and private student loans— understanding the nuances of the choices within federal loans is important. Below we’re tackling the differences between Direct Subsidized and Direct Unsubsidized federal student loans, also known as Stafford Loans.

What’s the Difference Between Direct Subsidized Loans and Direct Unsubsidized Loans?

The main difference between subsidized and unsubsidized loans is when interest starts accruing and who is responsible for paying it. For Direct Subsidized Loans, the U.S. Department of Education pays the interest that accrues during college, during the six month grace period after a student graduates, and during any other deferments. For Direct Unsubsidized Loans, interest begins accruing on the loans as soon as they are taken out and it’s the student’s responsibility to pay all interest accrued.

Subsidized Loans Unsubsidized Loans
You need to demonstrate a financial need. You do not need to demonstrate financial need.
Only available for undergraduates. Available for both undergraduate and graduate students.
The government pays, or subsidizes, the interest on the loan while you’re in school, during your grace period, and during any other deferments. You pay all the interest, including that which accrues during school, during your grace period, and during any other deferments.

What Are the Similarities Between Direct Subsidized Loans and Direct Unsubsidized Loans?

Both direct subsidized loans and direct unsubsidized loans are for students to help cover the cost of higher education. While there are important differences between each offering, there are key similarities.

Eligibility: To apply for either, students will need to fill out FASFA forms each year. After that, your school decides what federal aid you qualify for and then sends a financial aid package letter to you.

Loan Fees: Both loan offerings come with the same fees. 1.069% for loans disbursed on or after Oct. 1, 2016, and before Oct. 1, 2017. 1.066% for loans disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018.

Interest Rates: According to the Federal Student Aid website, both options have a 4.45% interest rate (for undergraduates currently).

Financial Aid Eligibility Period: Both direct subsidized and direct unsubsidized loans have the same eligibility period. The longest is 150% of the length of the degree track you are enrolled in. For example, you could qualify for six years of funding for a four-year undergraduate program.

The Pros and Cons of Direct Subsidized Student Loans

The differences between subsidized and unsubsidized student loans are critical to understanding if you’re planning to take out student loans. One big difference is that subsidized loans are awarded only to undergraduate students and are based on financial need and cannot exceed that amount.

Pros of Direct Subsidized Loans:

  • The U.S. Department of Education pays the interest on subsidized loans so long as you maintain at least half-time enrollment.
  • The government pays the interest during the six-month grace period after you graduate.
  • The government pays the interest during a period of deferment.

Cons of Direct Subsidized Loans:

  • Lower annual borrowing limits than unsubsidized loans.
  • Students won’t qualify if they can’t demonstrate financial need.
  • Graduate students don’t qualify for direct subsidized loans.

The Pros and Cons of Direct Unsubsidized Student Loans

Unlike subsidized loans, unsubsidized loans are available to all students regardless of need. If federal loans don’t cover all the costs, private student loans can also be used to pay for education. However, before signing for loans, really look at how much you’re borrowing and whether you need as much as you’re taking.

Pros of Direct Unsubsidized Loans:

  • Undergraduate and graduate student qualify for direct unsubsidized loans.
  • Students don’t need to demonstrate financial need to apply.

Cons of Direct Unsubsidized Loans:

  • Loan limits are slightly higher for unsubsidized loans; as a result, many students borrow more than the actual cost of their tuition in order to cover fees and other education-related expenses.
  • Accepting more money than you need can add thousands of dollars to your total debt and make it more difficult to afford your future monthly payments.
  • Borrowers are responsible for paying all interest accrued beginning when the loan is issued.
  • You’re responsible for paying interest on unsubsidized loans at all times.

How Much Can You Borrow With Federal Student Loans?

Generally known as Stafford Loans, these subsidized and unsubsidized federal student loans are given to eligible students at thousands of colleges, universities and technical schools across the country.

Your school determines how much you can borrow based on a variety of factors, such as the cost of attendance and dependent status. With slightly better terms designed to help out lower-income students, subsidized loans are generally the less expensive option.

How Do You Apply for Federal Student Loans?

Here are step-by-step instructions on how to apply for Direct Federal loans:

  1. Fill out the FAFSA or Renewal FAFSA (for returning students) online at
  2. Your school’s financial aid office will mail or email a financial aid award letter to summarize your available financial aid. This letter will include details about federal loans and other grant and work-study programs based on your eligibility and financial need.
  3. Accept the financial aid and student loans by contacting your school’s financial aid office.
  4. Review and sign any paperwork to secure your financial aid, such as the Master Promissory Note (MPN) for loans.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.