Subsidized vs. Unsubsidized Loans: Which is Better?

Dena Standley | March 22, 2023

Edited by Hannah Locklear

If you want a federal direct student loan, you may wonder which plan best suits your needs.

Subsidized loans target financially needy students. The amount they can borrow is the enrollment cost minus expected family contribution and other financial aid. Unsubsidized loan applicants do not need to prove that they are struggling financially.

Both are low-interest loans when compared to private lenders' interest rates. This article explains which loan type may work best in your situation. First, let's discuss the significant differences between these two types of loans.

What is the difference between subsidized and unsubsidized loans?

The difference between a subsidized and unsubsidized loan lies in the amount you can borrow, terms of repayment, interest, and who can apply. Below, we’ll break down each of these factors in detail.

Who can apply?

Subsidized loans are strictly available to undergraduate students who can prove their or their parents' economic struggles.

On the other hand, unsubsidized loans are available to more students, including undergraduate, graduate, and professional students. No proof of financial need is necessary.

To qualify for either loan, you must be enrolled at least half-time at an institution participating in the direct federal loan program. You must be a US citizen or an eligible non-citizen. You also need a valid Social Security number.

Applicants for both loans must also hold a high school diploma or equivalent. You may not qualify if you have defaulted on an existing federal loan.

Students can apply here.

How does interest accrue?

Direct subsidized and direct unsubsidized federal loans are low-interest. They are considerably cheaper when compared to private lenders.

For loans disbursed between July 1, 2022, and June 30, 2023, interest rates for undergraduate students are 4.99%, and for graduate students, 6.54%. These are fixed rates for the life of the loan.

The difference comes in how interest accrues. For subsidized loans, the federal government pays interest for as long as you are enrolled in school at least half-time, for the grace period (six months) after you graduate or drop below half-time, and during loan repayment deferment.

Unsubsidized loan interest begins to accrue immediately and adds to the total loan you take out by graduation unless you pay off monthly interest while in school. The government does not pay any interest on unsubsidized loans.

A 1.057% loan fee is deducted from each disbursement for loans disbursed on Oct 1, 2020, to before Oct 1, 2023, for both loans.

How much can applicants receive?

The federal government applies an annual and aggregate limit on how much students can take. The amount should not exceed the student's financial needs. The school you plan to attend also determines how much you will receive.

Direct subsidized and unsubsidized loans have an annual limit of between $5,500 and $12,500 for undergraduates. The limit increases gradually with each subsequent academic year but may be at most $12,500. Students' dependency status also affects how much they can receive per year.

The annual direct unsubsidized loan yearly limit for graduate and professional degree students is $20,500. Since 2012, subsidized loans have not been available to graduate or professional students.

The aggregate limit is $57,500 for undergraduates, $23,000 of which may be subsidized. Graduate students can take out a total of $138,500, $65,500 of which may only be subsidized if it was disbursed before July 1, 2012, or taken for a prior undergraduate program.

Which is better: A subsidized or unsubsidized loan?

As the discussion above has shown, each loan type suits different students.

A direct subsidized loan may be best for you if:

• You can prove that you or your parents are financially needy.
• You are an undergraduate student.
• You want to pay less interest.

A direct unsubsidized loan is best for:

• Graduate or professional students.
• Students who want a higher loan limit.
• Students who are okay with paying slightly more interest.
• Those who wish to skip credit checks and financial ability inquiries.

The following are some disadvantages to consider before deciding which federal direct loan to take.

Subsidized loan cons

• Not available to graduate or professional students.
• Applicants must demonstrate financial need.
• Lower loan limit.

Unsubsidized loans cons

• Students pay all the interest without the government's help.

Planning for college starts with acquiring money for tuition and other expenses. The federal government has made it a lot easier to access student aid. With low-interest rates, students who need help paying for college can afford to chase their dreams.

Whether you choose a direct subsidized or a direct unsubsidized student loan, you will get better terms and rates than a student who goes to a private lender.

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