Subsidized vs Unsubsidized Loans

Understanding the difference between subsidized vs. unsubsidized student loans could help you save a bundle in student loan debt.

But considering how much they have in common, it’s understandable if you have trouble telling them apart (especially since they also go by other names — we’ll explain in a bit).

Both loans are part of the federal government’s financial aid offerings, designed to help students cover the cost of college. To qualify for the federal direct loan program, you must be enrolled at least half-time in school in a program that leads to a degree or a certificate.

Although unsubsidized claims a larger portion of outstanding direct loans — $563.5 billion compared to $291.5 billion in subsidized loans as of the fourth quarter of 2021 — there’s plenty of overlap among borrowers who take out both types.

We’ll explain the difference between the two loans and how each can affect your finances long after you finish your final exams.

Subsidized vs. Unsubsidized Student Loans

A side-by-side comparison of subsidized and unsubsidized loans is probably the easiest way to see the differences — we’ll get into the details after.

Based on this chart, the winner is direct subsidized loans. (If you don’t understand why, check that last row: Any option that includes someone else paying your bills is a winner).

But let’s take a closer look at each.

Who Qualifies for a Direct Student Loan?

You’ll need to be an undergraduate student who can prove financial need to qualify for direct subsidized loans. Your college’s financial aid office determines your eligibility. Direct unsubsidized loans do not require you to meet a financial need threshold. They are available to undergraduate, graduate and professional-level students.

Here are the details about proving financial need.

Qualifying for Subsidized Loans

The only way to get direct subsidized loans is if your college’s financial aid office determines you can’t afford to pay the cost of attending the school.

Although the formulas can get a little complicated — and vary by school — here’s a basic way for finding out how much you can get in subsidized vs. unsubsidized loans:

• Cost of attendance (COA) – expected family contribution (EFC) = need-based aid (including scholarships, grants, work-study programs and subsidized loans).
• Cost of attendance – financial aid you’ve already been awarded (including need-based aid and merit-based scholarships) = direct unsubsidized loan.

The financial aid office at your college decides how much financial aid you are eligible to receive, so if you think there’s an error or you would like to appeal, you should contact them.

What Are the Annual Loan Limits for Direct Federal Loans?

Undergraduate students can borrow between $3,500 and $5,000 in subsidized loans each school year, depending on the college, the year in school and the total amount borrowed — aka the aggregate loan limit. Unsubsidized loans have higher limits.

We’ll break down the limits by loan type provided by the Department of Education.

Subsidized Loan Limits for Undergraduates

The maximum subsidized loan limits are as follows, regardless of whether you’re considered a dependent or independent student:

• First year: $3,500
• Second year: $4,500
• Third year and beyond: $5,500
• Aggregate (total) subsidized loan limit: $23,000

Graduate students and professional degree students are not eligible for direct subsidized loans.

Unsubsidized Loan Limits for Undergraduate Students

Direct unsubsidized loans for undergraduate students are limited by your dependency status and by the amount of subsidized loans you’ve borrowed.

If you’ve received the maximum amount in subsidized loans, you’ll need to subtract that amount from the total unsubsidized limit. For example, if you’re a first-year dependent student who’s received the maximum subsidized amount of $3,500, you can also borrow up to $2,000 in unsubsidized loans ($5,500 – $3,500).

Note: If you are an undergraduate student whose parents are unable to obtain PLUS Loans, you qualify for the independent student loan limits.

Unsubsidized Loan Limits for Graduate and Professional Students

Graduate and professional students are eligible for direct unsubsidized loans, with an annual limit of $20,500 and an aggregate loan limit of $138,500.

However, if you still owe money on federal loans you took out as an undergraduate student, that amount is included in the total. No more than $65,500 of the aggregate loan limit may be in subsidized loans that you received as an undergrad.

Is There a Time Limit for Direct Federal Loans?

If you’re applying for the current or upcoming school year, there are no time limits for direct federal subsidized or unsubsidized loans. If you were a first year student between July 2013 and July 2021, you are restricted in subsidized loans by the length of your program.

Here’s the breakdown for both.

Subsidized Loans

As of July 1, 2021, there is no time limit for eligibility to apply for direct subsidized loans.

However, if you became a first-time borrower after July 1, 2013, and and before July 1, 2021, there is a time limit. That limit is 150% of the published length of the program you were enrolled in — so if you were in a four-year program, you have six years worth of eligibility, so long as you’ve been enrolled at least half-time.

Unsubsidized Loans

There is no eligibility time limit for unsubsidized federal loans.

How Does Interest Accrue on Federal Student Loans?

The U.S. Department of Education suspended all interest and payments for eligible federal subsidized and unsubsidized student loans through Aug. 31, 2022, due to the pandemic.

Subsidized loans

If you have a subsidized loan, the federal government pays the interest on loans when you’re in school at least half-time, during the six-month grace period after you leave school and during deferments.

Unsubsidized loans

If you have an unsubsidized loan, interest accrues each year of college and during your grace period. After the grace period ends the interest capitalizes.

Confused? Let’s look at an (admittedly simplified) example:

Sara and John each apply for federal student loans to cover expenses during their junior and senior years of college.

Both years, they each receive $5,000 loans with a 3% interest rate.

Sara qualifies for a subsidized loan while John gets an unsubsidized loan. Let’s see where each ends up.

What Are the Interest Rates for Direct Federal Loans?

For direct subsidized and unsubsidized loans disbursed between July 1, 2021, and July 1, 2022, the undergraduate interest rate is 3.73%. For graduate students, the unsubsidized loan interest rate is 5.28%. Those rates are currently suspended during administrative forbearance, which end Aug. 31, 2022.

Each year, the federal government sets the interest rates for all student loans.

Do Federal Loans Charge Fees?

For subsidized or unsubsidized loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2022, the loan fee is 1.057%. On a $3,000 loan, the fee would be $31.71, so you’d receive $2,968.29.

The fee changes from year to year and is calculated as a percentage based on when you took out your loan.

How Will I Receive My Subsidized or Unsubsidized Loan?

Whether it’s subsidized or unsubsidized, your student loan money is sent directly to the school to cover your tuition, fees and room and board every semester, trimester or quarter.

If there is any money left over (or if you’re living off campus), the school will send you a check for the remaining amount within 14 days. For textbooks and other learning materials, the school must provide a way for you to access the funds within seven days of the start of the term.

If you can find your textbooks and class materials for less than the campus bookstore sells them, you can request a check for the remaining amount.

Your school is required to publish the International Standard Book Number (ISBN) for all required texts in the online course schedule. Use this number if you decide to shop for better prices.

If this is the first time you’ve received a direct subsidized or unsubsidized student loan, you should be aware of the following additional restrictions:

• If you’re a first-year undergraduate student and a first-time borrower, the school may wait up to 30 days to give you your loan money. If you need the money before then (for books, for instance), the school should have a policy in place to either provide a bookstore voucher or another way to cover the cost until you receive your loan money.
• The federal government requires you to complete a 30-minute online entrance counseling session before you can accept a loan. Your school may require additional or alternate counseling, so check with the financial aid office first.

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

Congress renamed the federal direct loan program in 1988 to honor U.S. Senator Robert Stafford for his work on higher education; now direct loans also go by the names Stafford loans or direct Stafford loans.

Consider this your cheat sheet:

• Direct subsidized loans = subsidized Stafford loans = direct subsidized Stafford loans.
• Direct unsubsidized loans = unsubsidized Stafford loans = direct unsubsidized Stafford loans.

The federal student loans for undergraduate students are called direct subsidized and direct unsubsidized loans, which are different from Parent or Graduate Plus loans, consolidated loans and the now-defunct Perkins loans.

Another name you might hear: Federal Family Education Loans (FFEL). This program ended in 2010 — all subsidized and unsubsidized student loans are now made under the direct loan program.

FAQ: Subsidized vs. Unsubsidized Federal Student Loans

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

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