A quick guide to subsidized vs. unsubsidized loans

College can open the door to financial opportunities, but the cost of attending can be steep. That’s why many students finance their education with federal student loans

Federal student loans typically fall into one of two categories: subsidized or unsubsidized. Both options typically have lower interest rates, better terms and more protections than do private loans. But there are major differences between the two, including borrowing costs, eligibility requirements and more. 

Comparing subsidized and unsubsidized loans can help students see if either option is right for them. 

Key takeaways

  • Both subsidized and unsubsidized loans are offered through the Department of Education (DOE).
  • Subsidized loans are need based, but unsubsidized loans aren’t based on financial need.
  • Subsidized loans are only available to qualifying undergraduates. Unsubsidized loans are open to both undergraduate and graduate students. 
  • From 2020 to 2021, 6.8 million students borrowed subsidized and unsubsidized loans through the Direct Loan Program. 

Student rewards credit cards

With responsible use, students can earn cash back rewards today while building credit for tomorrow.

Explore cards

What is federal financial aid for students?

Federal financial aid plays an important role in many students’ ability to afford college and universities as well as technical, trade or career schools. It’s provided through the government and includes grants, work-study programs and subsidized and unsubsidized loans.

Some of these aid types are need based, while others aren’t. Students must meet the DOE’s basic eligibility requirements to receive any type of federal financial aid. 

Who is eligible for federal student aid

To qualify, students must:

  • Be a U.S. citizen or an eligible noncitizen.
  • Have a valid Social Security number, but there are exceptions.
  • Be accepted at or enrolled in an eligible degree or certificate program.
  • Meet regular student status.
  • Meet a school’s standards for satisfactory academic progress. 
  • Prove they’re qualified to receive a college or career school education. 

Students must also certify on their Free Application for Federal Student Aid (FAFSA®) form that they don’t have defaulted federal student loans, don’t owe money on a federal student grant, and will only use federal student aid for educational reasons.

What is FAFSA

If a student wants to apply for any type of federal aid, they must complete the FAFSA. The application asks students about their family finances. And they have to fill it out every year they’re in school to remain eligible for aid. You can review current FAFSA deadlines to learn more.  

Schools use FAFSA information to determine which types of aid students can receive. Some students may have remaining costs after scholarships, grants or other forms of aid are applied to their account. If this happens, it could be helpful to explore financing options—like federal student loans. 

Federal student loans vs. private loans

According to the Consumer Financial Protection Bureau (CFPB), student loans generally fall into one of two categories: federal or private. Federal loans are offered directly through the government. But private loans can come from different lenders, including banks, credit unions and other financial institutions. 

The CFPB recommends that students explore their federal loan options first. That’s because federal loans often have lower interest rates, flexible repayment plans and other benefits that private loans may not offer. 

But if federal loans aren’t enough to cover expenses, students may also pursue private options. If that’s the case, the CFPB suggests students shop around for the best private rates and carefully review loan terms before they sign on the dotted line. 

If you’re weighing federal vs. private student loan options, here are some things to consider.

Federal loans Private loans

Repayment begins six to nine months after students graduate, leave school or drop below part-time enrollment.

Repayment varies by lender, but payments could be required while students are still in school.

Don’t require co-signers.

Often require co-signers.

Could be ideal for those with little or no credit history.

Could be ideal for those with a strong credit history.

Have fixed interest rates.

Often have variable interest rates.

Require borrowers to apply through the FAFSA.

Application process varies by lender.

Have a variety of repayment plans, including Income-Based Repayment (IBR) and Pay As You Earn Repayment (PAYE).

Repayment plans vary by lender and are typically less flexible.

May be eligible for student loan forgiveness.

Don’t qualify for federal student loan forgiveness.

Most federal loans have yearly and total borrowing limits.

Those with strong credit history might be able to borrow larger amounts.


Key differences between subsidized and unsubsidized loans

The federal Direct Loan Program offers both subsidized and unsubsidized loans. 

Understanding the differences between subsidized and unsubsidized loans can give students a better idea of their borrowing costs and responsibilities. Here are some key things to keep in mind. 

Loan-specific qualification requirements

Subsidized loans are a top choice for students because they have lower borrowing costs. But Direct Subsidized Loans are only available to undergraduate students who can demonstrate financial need. 

A school’s financial aid department is responsible for determining financial need. This number is based on the cost of attendance minus the student’s expected family contribution and any other aid―like scholarships―the student may receive. 

However, Direct Unsubsidized Loans are available to both undergraduate and graduate students regardless of financial need.

They may have different interest rates 

Interest rates on private loans can vary by lender and be fixed or variable. And private lenders use factors like a borrower’s credit scores to determine which rate to offer.

The federal student loan interest rate that’s offered to new borrowers may change from one year to the next. But once a loan is disbursed, the rate remains fixed. These rates are set by Congress, so they aren’t affected by a borrower’s credit history. All borrowers are offered the same interest rate, which is determined by their degree type.

Here are the federal student loan interest rates for the 2022-2023 school year:

  • Undergraduate students: Subsidized and unsubsidized loans both have a 4.99% fixed interest rate. 
  • Graduate students: Grad students are only eligible for unsubsidized loans with a 6.54% fixed interest rate. 

Interest accrues at different times

Another key difference between subsidized and unsubsidized loans is the way interest accrues. And this can directly affect borrowing costs.

The DOE pays the interest on subsidized loans:

  • While the student is in school at least part time.
  • For the first six months after they graduate or leave school.
  • During a deferment period. 

Because the DOE covers interest during these times, borrowers could pay less interest over the life of their subsidized loan. 

For graduate students or those who can’t prove financial need, an unsubsidized loan may be their only federal option. Unfortunately, these loans accrue interest from the moment they’re disbursed. If borrowers don’t pay interest during school enrollment or grace periods, it will build up. When that happens, the interest becomes capitalized, which means it’ll be added to the principal loan balance.

Even though unsubsidized loans have higher borrowing costs, they typically have lower interest rates than private options do. Plus, they offer federal protections―like income-driven repayment and forbearance programs. 

Subsidized loans vs. unsubsidized loans: How much can you borrow?

There are annual and total borrowing limits for subsidized and unsubsidized loans. These limits can vary by loan type, a student’s year in school and their dependency status. 

According to the DOE, a student’s school determines how much aid they’re eligible to receive. So the actual amount a student gets may be lower than the limit.

Borrowing limits for subsidized and unsubsidized loans

Direct Subsidized Loans have different annual and total borrowing limits than Direct Unsubsidized Loans. 

Here’s a breakdown of yearly and aggregate borrowing caps for subsidized and unsubsidized loans:

Year in school Total combined limit Subsidized loan limit

Dependent undergraduates

$31,000 total

$23,000 total

Independent undergraduates and dependent undergraduates who aren't PLUS loan eligible

$57,000 total

$23,000 total

Graduate students 

$138,500 total for undergraduate and graduate studies

$65,000 total (includes subsidized loans received during undergraduate studies)


Year in school Yearly limit for dependent students Yearly limit for independent students

First-year undergraduates

$3,500 subsidized loan limit

$5,500 total

$3,500 subsidized loan limit

$9,500 total

Second-year undergraduates

$4,500 subsidized loan limit

$6,500 total

$4,500 subsidized loan limit

$10,500 total

Third-year & up undergraduates

$5,500 subsidized loan limit

$7,500 total

$5,500 subsidized loan limit

$12,500 total

Graduate students

Graduate students are considered independent.

$20,500 total unsubsidized loan limit


Once a borrower reaches these limits, they won’t receive more funds. But borrowers who repay some or all of their loan while they’re enrolled may apply for more funds, up to the total limit. And those who don’t qualify for Direct PLUS Loans may be eligible for higher loan limits.

You could reach out to your school’s financial aid office for more information.

Subsidized vs. unsubsidized loans in a nutshell

Student loans can help cover rising college costs. But the borrowing decisions students make today could affect their financial futures. 

Federal student loans could have lower interest rates and more protections than private loans. Federal student loans are either subsidized or unsubsidized. 

Direct Subsidized Loans have lower borrowing costs, but they’re only offered to undergraduate students with financial need. Direct Unsubsidized Loans accrue interest while students are in school, but they’re available to undergraduate and graduate students regardless of financial need. 

If you want to apply for federal student aid, like subsidized or unsubsidized loans, you’ll need to fill out the FAFSA. You can also learn about more ways to pay for college and how to achieve financial success after graduation.

Related Content