The words “subsidized and unsubsidized loans” get thrown around a lot in conversations about borrowing money for school.
We all know the definition of these words in normal English, but what do they mean specifically in the context of student loans? And what is the difference between subsidized and unsubsidized loans?
The short answer is that the U.S. Department of Education offers subsidized and unsubsidized loans to eligible students at participating schools. The basic difference between a subsidized loan vs an unsubsidized loan is that subsidized loans have better terms but are harder to qualify for and cover a smaller amount.
Direct subsidized loans are offered to undergraduate students who can demonstrate financial need. There are no credit checks for subsidized loans. The only requirement is submission of a Free Application for Federal Student Aid (FAFSA) form.
Your school determines how much you can borrow in subsidized loans, with the upper limit being $3,500 to $5,500 per year.
The interest rate on a subsidized loan is 3.73% in 2021-22. The U.S. Department of Education pays the interest on the loan while you’re in school at least half-time, for the first six months after you leave school, and during any periods of deferment. At all other times, the borrower pays the interest.
Direct unsubsidized loans are offered to undergraduate students and graduate students, with no requirement to demonstrate financial need. There are no credit checks for unsubsidized loans. The only requirement is submission of a Free Application for Federal Student Aid (FAFSA) form. Students qualifying for a subsidized loan are also permitted to apply for an unsubsidized loan.
Your school determines how much you can borrow based on your cost of attendance and other financial aid you receive. The upper limit set by the federal government for unsubsidized loans is $5,500 to $20,500 per year, minus any subsidized loans.
The current interest rate on an unsubsidized loan is 3.73% for undergraduate students and 5.28% for graduate or professional degree students. The borrower is responsible for paying the interest on an unsubsidized loan during all periods. If you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, your interest will accrue and be added to the principal amount of your loan.
As mentioned, your school determines the loan types and loan amount you are eligible to receive each academic year. However, the federal government also sets upper limits on the amounts in subsidized and unsubsidized loans you may borrow each year.
These limits vary depending on what year you are in school and whether you are a dependent or independent student. According to the Department of Education, an independent student is one of the following: at least 24 years old, married, a graduate or professional student, a veteran, a member of the armed forces, an orphan, a ward of the court, someone with legal dependents other than a spouse, an emancipated minor or someone who is homeless or at risk of becoming homeless. Anyone not meeting one of the above criteria is a dependent student.
The following chart shows the annual and total borrowing limits for subsidized and unsubsidized loans.
| Year | Dependent students | Independent students |
| First-year undergraduates | $5,500 (no more than $3,500 in subsidized loans) | $9,500 (no more than $3,500 may be in subsidized loans) |
| Second-year undergraduates | $6,500 (no more than $4,500 in subsidized loans) | $10,500 (no more than $4,500 may be in subsidized loans) |
| Third-year and beyond undergraduates | $7,500 (no more than $5,500 in subsidized loans) | $12,500 (no more than $5,500 may be in subsidized loans) |
| Graduates or professional student | N/A | $20,500 (unsubsidized only) |
| Aggregate limit – undergraduates | $31,000 (no more than $23,000 in subsidized loans) | $57,500 (no more than $23,000 in subsidized loans). |
| Aggregate limit - graduates or professional students | N/A | $138,500 (no more than $65,500 in subsidized loans) across all studies, including previous undergraduate loans. |
This article wouldn’t be complete without a mention of private student loans. The basic difference between federal and private loans is that federal loans are offered by the federal government and private loans are offered by private lenders.
Federal loans tend to have lower interest rates and, as we showed above, are sometimes subsidized. Private loans have higher interest rates and are never subsidized. However, private loans have the advantage of covering up to 100% of your college expenses, minus any federal aid. Therefore, if you need to borrow the full amount of your annual tuition, fees, and additional costs, it makes sense to combine federal and private student loans.
As this article demonstrates, subsidized and unsubsidized loans aren’t exactly in competition with each other. Students who demonstrate financial need can apply for a subsidized loan, unsubsidized loan, or private loan – or all of the above. Students without financial need can apply for an unsubsidized loan and private loan but not for a subsidized loan.
The bottom line in assessing an unsubsidized loan vs a subsidized loan is that it all depends on your personal financial circumstances and the cost of attendance at your school.