Subsidized vs. unsubsidized loans: Which is best?

If you need to borrow cash for your education, you’ll likely turn to federal student loans first — 92% of the nation’s student debt is made up of federal loans, according to a 2022 Enterval Analytics report. 

And of federal lending options, Direct Subsidized and Unsubsidized Loans are the most common. Keep reading to learn how these loans work and which can offer you the best deal.

• Subsidized vs. unsubsidized loans: Which is best?
• What is a subsidized loan?
• How unsubsidized loans work
• How to apply for student loans
• What if I’m not eligible?

Subsidized vs. unsubsidized loans: Which is best?

Direct Subsidized and Direct Unsubsidized Loans operate in similar ways, except for one major difference: how interest is paid on the loan. 

If you have unsubsidized loans, you’re responsible for all interest that accrues over the life of the loan. With subsidized loans, however, the government will pay the interest that accrues while you’re attending school, during your grace period, and in other eligible periods of nonpayment. 

Here’s a side-by-side comparison of these loans for the 2022-23 school year.

	Direct Subsidized Loan	Direct Unsubsidized Loan
Interest rate	4.99%	4.99% (undergraduate students) or 6.54% (graduate or professional students)
Fee	1.057%	1.057%
Eligibility	Must be an undergraduate student with proven financial need who’s enrolled in an eligible degree or certificate program at least half time	Must be an undergraduate, graduate, or professional student enrolled in an eligible degree or certificate program at least half time
Undergrad limits	$3,500 (year 1) $4,500 (year 2) $5,500 (year 3+) $23,000 (lifetime limit)	Dependent students: $5,500 (year 1) $6,500 (year 2) $7,500 (year 3+) $31,000 (lifetime limit) Independent students: $9,500 (year 1) $10,500 (year 2) $12,500 (year 3+) $57,000 (lifetime limit)
Graduate limits	N/A	$20,500 per year $138,500 (lifetime limit)
Pros	Government pays accrued interest at set times Fixed interest rate Multiple repayment options	Higher borrowing limit No income requirements to qualify Fixed interest rate Multiple repayment options
Cons	Low borrowing limit Origination fee Must show financial need Not available to graduate students	Borrower pays all interest Origination fee Higher interest rate for graduate and professional students

What is a subsidized loan?

A subsidized loan is a federally issued educational loan for undergraduate students who demonstrate a financial need. The government pays the accrued interest on the loan while the borrower is in school, during their six-month grace period after graduating or dropping to less than half-time enrollment, and during any eligible periods of deferment. 

Ultimately, the borrower will pay less on their loan because the government will cover a portion of the interest costs and accrued interest won’t be added to their principal balance when the loan enters into repayment (a process known as capitalization). 

If you qualify for both subsidized and unsubsidized loans, it makes sense to maximize the subsidized debt before turning to other options. 

Eligibility 

To qualify for a subsidized loan, you must be enrolled as an undergraduate at least half time at a school that participates in the Direct Loans program, and pursue a course of study that results in a degree or certificate. You must also prove you have financial need by submitting the Free Application for Federal Student Aid (FAFSA), which collects information about your accounts and assets, as well as those of your family.  

If you’re eligible for a subsidized student loan, your maximum loan amount will be based on your year in school. You can borrow up to:

• $3,500 during your first year
• $4,500 during your second year
• $5,500 during your third year and beyond
• $23,000 during your entire undergraduate academic career

Interest and fees

Your loans will have a fixed interest rate, which means it will never change for the duration of the debt. Rates are also standardized, so every eligible borrower receives the same interest rate, regardless of credit. The interest rate for the 2022-23 school year is 4.99%.

Each subsidized loan comes with an origination fee, which can also change from year to year. The current fee is 1.057%, which will be subtracted from your loan amount before the funds are sent to your school.

Repayment options

When it’s time to pay off your subsidized loans, you can choose between several repayment plans with terms ranging from 10 to 25 years. If you can’t afford your payments, an income-driven repayment plan could help. These plans set your payment at a percentage of your income, and any remaining balance can be forgiven at the end of your term. 

Subsidized loans may also be eligible for student loan forgiveness if you meet the qualifying criteria. For example, if you make 120 qualifying loan payments while working for a nonprofit employer, you may have the remainder of your loan balance wiped away under the Public Service Loan Forgiveness program.

How unsubsidized loans work

Direct Unsubsidized Loans are a form of federal debt available to undergraduate, graduate, and professional students. Borrowers don’t have to demonstrate financial need to qualify and are responsible for all interest that accrues.

Tip: You can make interest-only payments while you’re in school. That way, your interest won’t get capitalized when the loan enters repayment.

Eligibility

Like subsidized loans, you must be enrolled in a participating school at least half time and pursue a degree or certificate to qualify for an unsubsidized loan. Your credit score and income aren’t factors in determining your eligibility.

If you qualify, your maximum loan amount is based on your school year and dependency status. If you’re a dependent student (most undergraduates are), you can access smaller amounts than independent students. You can borrow up to:

Dependent student	$5,500 (year 1) $6,500 (year 2) $7,500 (year 3+) $31,000 (lifetime limit)
Independent student	$9,500 (year 1) $10,500 (year 2) $12,500 (year 3+) $57,000 (lifetime limit)
Graduate student	$20,500 per year $138,500 (lifetime limit)

Note that these limits include any subsidized loans you borrow. 

Tip: If your parents aren’t eligible for a Direct PLUS Loan, you likely qualify as an independent student.

Interest, fees, and repayment

For the 2022-23 school year, unsubsidized loans have a 4.99% interest rate for undergraduates and a 6.54% interest rate for graduate and professional students. In addition, there is a 1.057% origination fee.

Once your grace period ends, you’ll have access to the same repayment options as subsidized student loan borrowers. You’ll also be able to apply for deferment, forbearance, and loan forgiveness, if applicable.

How to apply for subsidized and unsubsidized loans

To access any type of federal student aid, you must first submit the FAFSA. This form collects personal and financial information about you (and your family, if you’re an undergraduate). Your school will then use this data to determine your eligibility for aid, including subsidized and unsubsidized loans.  

The FAFSA must be submitted each year you attend school, and is typically completed in the fall. Once you’ve accepted any grants or loans you’ve been offered, the money will be sent to your school, which will apply the funds to outstanding costs. If any money is leftover, your school will send you a check for the remaining amount. 

What if I’m not eligible?

Many students who are U.S. citizens (or eligible noncitizens) will qualify for federal unsubsidized loans, so submit the FAFSA even if you think you won’t get any aid. However, if you need to borrow more or are ineligible for federal aid, consider alternate sources of funding such as scholarships and grants. 

If you still need more funding, a private student loan could help. You typically need good credit to qualify, but borrowing from a private lender can help you secure the money you need to finance your education.