Subsidized Loans vs Unsubsidized Loans

Subsidized Loan vs Unsubsidized Loan

In preparation for the next school year, you may want to learn the main differences between subsidized loans vs unsubscribed loans.

Nowadays, it’s difficult to afford a college education without financial assistance. That’s why many people search for every type of loan that could suit them.

Private student loans are out of reach for most people with low income though. They typically have bad credit, so they might not meet the required credit score.

Fortunately, the US Department of Education provides multiple types of federal direct loan programs. In turn, they could be a more preferable choice than the private options.

We’ll discuss the pros and cons of subsidized loans vs unsubscribed loans. Hopefully, this helps you make an informed choice for your education.

What Is A Subsidized Loan?

What Is A Subsidized Loan?

You may apply for an education loan that is partially shouldered by the federal government.

Subsidized loans accrue interest like other loans, but the government pays a portion on your behalf. Specifically, it pays the interest during these periods:

  • While you’re enrolled at least half-time
  • During grace periods. These last 6 months that occurs after you graduate, start attending less than half-time or leave school
  • During deferment, a duration of postponed payment. Eligibility requirements include unemployment, ongoing cancer treatment, and other economic hardship criteria

Between subsidized loans vs unsubscribed loans, people prefer the former. Unsurprisingly, it’s because it allows people to pay lower loan repayments.

During the grace period, subsidized loans don’t accrue interest. This enables borrowers to directly pay for the principal, so they could potentially finish repayments faster.

What Is An Unsubsidized Loan?

In contrast, the government doesn’t reduce the interest charged by unsubsidized loans.

These still provide a grace period lasting 6 months. However, you must repay the interest you’ve built up afterward.

Between subsidized loans vs unsubsidized loans, the latter is more accessible. Unlike subsidized options, these don’t require borrowers to demonstrate financial need.

Subsidized Loan vs Unsubsidized Loan

Subsidized Loan vs Unsubsidized Loan

After learning the basics, it’s time to learn their main similarities and differences.

These options have their own requirements, benefits, and risks. Analyze each option to find the one that suits your needs and financial situation.

Let’s compare and contrast both of these federal options. For more information, please check the Federal Student Aid website.

Key Differences

The interest subsidy sets subsidized loans vs unsubsidized loans apart.

As we’ve mentioned, subsidized loans charge no interest for six months. In contrast, unsubsidized loans don’t provide interest subsidies.

This means borrowers may repay subsidized loans faster than unsubsidized ones. However, they have stricter requirements, such as allowing access only to students with financial need.

Also, it’s only open to undergraduate students. Unsubsidized loans are available for professional students and graduate students as well. 

Here’s a summary of the key differences between subsidized loans vs unsubsidized loans:

CriteriaSubsidized LoansUnsubsidized Loans
Who are qualified to borrow?Undergraduate students onlyUndergrads, grad students, and professional students
How does it treat interest?Borrowers don’t pay interest while schooling at least half-time, during grace periods, or during defermentInterest accrues as normal.
Interest rate2.75%Undergraduates: 2.75%

Graduate and professional students: 4.30% 

Loan disbursement feeFrom October 1, 2019, and before October 1, 2020: 1.059%

From October 1, 2019, and before October 1, 2021: 1.057%

On or after October 1, 2019 – before October 1, 2020: 1.059%

On or after October 1, 2019 – before October 1, 2021: 1.057%


According to the table, unsubsidized loans charge undergrads lower interest. These also lend larger loan amounts compared to subsidized counterparts.

However, unsubsidized loans grow much faster in interest than subsidized loans. Consequently, it’s best to complete interest payments before leaving school.

Key Similarities

Key Similarities

After contrasting subsidized loans vs unsubsidized loans, let’s compare their similarities.

Of course, they both require monthly payments throughout the life of the loan. These are usually more preferable than private loans since they don’t conduct credit inquiries. 

However, both types of loans have annual limits. In turn, you may have to take out private loans for additional financial help.

What’s more, both provide borrowers with 6 months of no interest payments. Although, subsidized and unsubsidized loans accrue interest differently during a forbearance period.

Even better, they allow benefits from other federal programs. For instance, the CARES Act suspended federal student loan payments and collections until September 30, 2021.

Which Is Better?

Your choice between subsidized loans vs unsubsidized loans will depend on your needs.

Subsidized loans may help you complete repayment faster. If you truly need financial aid, these could help cover your education costs.

If you’re a graduate or professional student, you should borrow an unsubscribed loan instead. What’s more, unsubscribed loans provide more funds than subscribed counterparts.

Please check the Federal Student Loan Guide For Students to better choose between subsidized loans vs unsubsidized loans. Your school will determine the loan types and amounts available to you.

How Do I Apply?

  1. Fill out your Free Application for Federal Student Aid (FAFSA) form. The government and colleges use this to determine financial assistance packages. Make sure to submit yours on time.
  2. After submitting your FAFSA form, you’ll receive a financial aid letter. This will outline the amount of assistance you may get and your eligibility for a subsidized loan. Please read the terms and conditions carefully before proceeding.
  3. Accomplish the requirements and the paperwork. You’ll have to sign a promissory note to declare that you agree to the loan’s terms. If you haven’t received a federal loan before, you’ll have to complete online entrance counseling. This will explain your obligations and responsibilities as a borrower.
  4. Eventually, you’ll receive your loan. Your college will use it to cover costs such as tuition and other fees. If there are leftover funds, you’ll receive the remaining amount. However, you must only use the money for education expenses.

Regardless of your choice between subsidized loans vs unsubsidized loans, you’ll proceed with the same application process.

Other Types Of Student Loans

Other Types Of Student Loans

One student loan may not be enough to cover your education costs. Consequently, you may apply for other kinds of education loans. 

For example, Direct PLUS Loans cover other expenses that financial aid cannot. 

Unlike other federal student loans, this requires a credit check. Still, people with bad credit may receive a PLUS loan if they meet additional criteria.

It’s available for professional and graduate students from schools included in the Direct Loan Program. Also, parents may borrow PLUS Loans if they meet other criteria.

Furthermore, Direct Consolidation Loans allow you to consolidate several student loans into one. No matter which you chose between subsidized loans vs unsubsidized loans, you may combine them. 

This could ease monthly payments by spacing them out over a longer repayment period. Also, this allows you to convert variable-rate loans into fixed-interest ones.

Lastly, you may supplement your education payments with private student loans. You’ll need a good credit rating to qualify though.

Private loans also charge higher interest rates that may fluctuate. They also lack flexible repayment plans found in federal alternatives. However, you may refinance these for a lower interest rate. 

Final Thoughts

No matter your side between subsidized loans vs unsubsidized loans, you should read the terms and conditions carefully.

Remember that student loans are an important decision in a person’s life. They carry significant consequences to your future career and finances.

Prepare for the financial responsibility that entails student loans. Make sure you’re 100% decided on your chosen course and school.

More importantly, you should learn how to properly manage your finances. For more financial tips, click here.