Federal student loans: Subsidized vs. unsubsidized loans
Paying for college can feel like a daunting task. After all, just one year of schooling can cost tens of thousands of dollars. Applying for federal student aid and looking for scholarships and grants can help you get the funding you need to cover your costs.
When you receive your financial aid letter, you may see two federal student loan types on offer: subsidized and unsubsidized.
Here’s a breakdown of each type of loan and what they mean for your long-term student debt situation.
Key Points
- The federal government covers subsidized loan interest while you’re in school.
- Unsubsidized student loans accrue interest while you’re in school.
- After a three-year pause on federal student loan payments, the Department of Education resumed payment collection in October 2023.
What are federal student loans?
The government offers federal student loans to pay for school. The government is the lender, but it contracts with private companies to service the loans. Because the government is the lender, there aren’t credit requirements for student loans.
According to the Department of Education, there is no income cutoff to qualify for federal student aid. A formula set by Congress determines interest rates, and everyone pays the same rate. For those who can’t afford to pay for school from their savings or who don’t get enough scholarships or grant money, federal student loans can help close the college funding gap.
Student loans are disbursed each semester, and interest rates are set yearly. As a result, the loan you receive for your first year in school might have a different interest rate than loans that cover subsequent years. Additionally, you’ll pay a disbursement fee, so you won’t get your full loan amount in cash. Your total required payments will include the fee, and you’ll pay interest on that fee.
Subsidized vs. unsubsidized loans
There are no income requirements to get an unsubsidized federal student loan, but if you demonstrate financial need, you might qualify for a subsidized student loan.
- Subsidized student loans cost less overall because the federal government pays the interest while you’re in school and during the six-month grace period after you leave school.
- Unsubsidized student loans accrue interest while you’re in school. You can pay the interest as you go, although it’s not required. Unpaid interest will be added to your total loan balance after graduation.
You must fill out the Free Application for Federal Student Aid (FAFSA) to get either type of loan. Information from the FAFSA is sent to the schools you select, and they put together financial aid packages that include federal student loans. You’ll be told how much you’re eligible for in terms of both subsidized versus unsubsidized loans, along with other aid you might have been granted, including Pell Grants, scholarships, and state-based aid.
It’s also important to note that there are different student loan limits based on whether you’re considered an independent student (such as an adult going back to get a college degree) or a dependent student (such as a teenager living at home with parents).
Overview of subsidized vs. unsubsidized loans
| Subsidized | Unsubsidized | |
|---|---|---|
| Do you need to demonstrate financial need? | Yes | No |
| How much can you borrow each year? | Depending on your year in school, $3,500 to $5,500. | Depending on your year in school, $5,500 to $7,500 for dependent students and $9,500 to $12,500 for independent students. Up to $20,500 per year for graduate students. (Note: These limits include any subsidized loans you may also receive.) |
| How much can you borrow in total for all of your years in school? | $23,000 | $31,000 for dependent undergraduates; $57,500 for independent undergraduates; $138,500 for graduate students. |
| How does the interest work while you’re in school and during the grace period? | The U.S. Department of Education pays interest. | Interest accrues on your loan and is added to your balance when it’s time to make payments. |
| Are these loans available to graduate students? | No | Yes |
How subsidized student loans work
To qualify for subsidized student loans, you must show financial need. Information from your FAFSA determines whether your family meets the income threshold to qualify for subsidized student loans. If you qualify, you’ll be offered subsidized loans as one of your student aid options.
While you’re in school, the government will pay your interest so it doesn’t increase the amount you owe.
How unsubsidized student loans work
There are no income requirements in order to get an unsubsidized loan. Additionally, it’s possible to use unsubsidized loans for graduate school.
Unpaid interest on unsubsidized loans accrues while you’re in school. At the end of your grace period, the interest is capitalized, which means it’s added to your total loan balance. For undergraduate student loans disbursed between July 1, 2023 and June 30, 2024, the interest rate is 5.5%.
You can make interest payments during school to avoid adding that amount to your loan. Any remaining unpaid interest will increase your loan balance. And you’ll pay interest on that interest as you repay your debt.
The bottom line
Fill out a FAFSA each year that you want federal aid, including student loans. Whether you get subsidized or unsubsidized loans will depend on your family situation each year. Make sure you fill out the form so you can see what federal aid you’re eligible for.
Depending on your situation, you might receive a mix of subsidized and unsubsidized federal loan offers. You can take both types of loans to help pay for your schooling. Chances are you’ll need a combination of different types of financial aid, and using subsidized and unsubsidized federal student loans is part of the picture for many students.
Just make sure you understand the terms before moving forward, and consider other types of student aid before making your decision.