Subsidized vs. Unsubsidized Loans: What’s the Difference?


Last updated November 16, 2023

College tuition has reached an all-time high and will continue to rise in years to come. Deciding how to finance college is always a daunting task. Most student loans — about 92% of the nation’s total student debt—are federally owned by the U.S. Department of Education.

If you choose to get federal loans as financial assistance, it’s essential to understand how they work and how you’ll be paying them back. Your choice will be the difference between paying a lot of interest or paying exactly how much you borrowed. We’ll break down the two main types of federal student loans (sometimes called Stafford Loans) so you can make an informed decision before borrowing. So, let’s break down subsidized vs. unsubsidized loans so you can pick the best one for you. 

What are Subsidized Loans?

Subsidized loans are part of the Federal Direct Loan program and are only available for undergraduate students with financial need. The main difference between subsidized vs. unsubsidized loans is that subsidized loans won’t accrue interest while you’re in school at least half-time or during deferment and grace periods. 

To determine if you qualify for a subsidized loan, apply the Free Application for Federal Student Aid (FAFSA) and provide your family’s income information. FAFSA also allows you to apply for Pell Grants, work-study programs and other types of loans to assist with the cost of your education. 

Subsidized loans are need-based and determined by subtracting expected family contributions and other financial aid, such as grants or scholarships, from your cost of attendance. After graduating, the government will pay the interest on your subsidized loan for the first six months, known as a grace period, before repayment kicks in. 

Eligibility criteria and limitations of subsidized loans

The amount you can borrow will be determined by the school, not exceeding your financial need. First-year dependent undergraduate students can borrow up to $3,500 in subsidized loans for an academic year. A second-year student may borrow no more than $4,500, with a Junior and Senior up to $5,500 for an academic year. The maximum amount of subsidized loans for your undergraduate education is $23,000 as of 2023. 

What are Unsubsidized Loans?

Now, let’s talk about unsubsidized loans. Unsubsidized loans in the U.S. are federal student loans available to both undergraduate and graduate students, regardless of financial need. 

Unsubsidized loans from the federal government do not have interest paid by the government while the student is in school, in deferment, or during the grace period. This means that interest accumulates from the loan’s inception and adds to the principal amount (the amount you borrowed). Interest increases the loan amount and results in paying more than what was borrowed over time. Financial experts suggest paying the interest while in school, even if not making monthly payments towards the principal amount. The interest rate on the loan is fixed and will not change over time.

The loan amount is determined by your school, considering your attendance cost and any other financial aid you receive. You won’t have to make monthly principal payments until six months after leaving school.

Eligibility criteria and loan limits for unsubsidized loans

You must complete the FAFSA (just as for subsidized loans) to apply for eligibility.  The amount you may borrow depends on whether you are a dependent or independent student and your grade level. For example, a first-year student ineligible for subsidized loans may borrow up to $5,500 in unsubsidized loans as a dependent student and $9,500 as an independent student. A senior may borrow up to $7,500 as a dependent student and $12,500 as an independent student in unsubsidized loans. Graduate or professional students are eligible for up to $20,500 per year. 

Aggregate Loan Limits

The maximum amount students may borrow is $31,000 as a dependent student and $57,500 as an independent student, with no more than $23,000 in subsidized loans. The maximum lifetime borrowing limit for graduate or professional students is $138,500, with no more than $65,500 in subsidized loans. This limit includes all federal loans for both graduate and undergraduate study.

Applying for Subsidized vs. Unsubsidized Loans

To obtain either federal loan, you must first complete and submit the FAFSA form. Your school will use this information to determine how much student aid you can receive as part of your financial aid package. Keep in mind that interest rates on both subsidized and unsubsidized loans can change each year, so it’s important to check the new rates before deciding. From July 2023 to July 2024, undergraduate subsidized and unsubsidized loans have an interest rate of 5.50%, while graduate unsubsidized loans have an interest rate of 7.05%.

Most federal student loans have loan fees.  These fees are a percentage of the total loan amount and are deducted from each loan disbursement. The loan fee for loans disbursed on or after Oct. 1, 2020 and before Oct. 1, 2024, is 1.057%. This fee is separate from the interest rate.

How to apply for FAFSA

  1. Create a FSA ID. This is the unique login that you will use to access both FAFSA and other financial aid websites.
  2. Collect all your financial information. Gather all information about you and your family’s income, assets, and expenses. You can use the IRS Data Retrieval Tool to retrieve your tax information from the IRS. During this step, it’s vital that you pay attention to details as it can affect the financial aid amount you receive.
  3. Complete the FAFSA form. Take your time and complete the FAFSA form electronically on their website and submit.
  4. Wait for your Student Aid Report. After your school determines your financial aid eligibility, you’ll receive a report with how much financial aid you can receive. You can prepare by using the Furman University Net Price calculator for estimates.
  5. Accepting federal student loans. Once you decide subsidized vs. unsubsidized loan amounts, you can accept the loan and sign the Master Promissory Note, the repayment agreement.
  6. Receive the money. Once your loan is approved, the school will allocate the funds to your school account to cover tuition, fees, room and board, and other school-related expenses. If there are any remaining loan funds, they will be refunded to you to be used exclusively for your education expenses.  

Who qualifies for federal student loans?

To be eligible for both subsidized and unsubsidized federal direct student loans, you must:

  • be a U.S. citizen, permanent resident, or eligible non-citizenship
  • be enrolled at least half-time at a school
  • not have defaulted on any existing federal loans
  •  make satisfactory academic progress

Three tips for a smooth FAFSA application process

  1. Start early. Every year, FAFSA becomes available in December, so start working on it early so you can collect all of the information and make an informed decision.
  2. Be detailed. Any errors could delay financial aid decisions and affect the amount you receive. Take your time going over every number to be accurate.
  3. Save all receipts. Keep a copy of your FAFSA confirmation page just in case there are any mix-ups with your school’s financial aid office.

Loan Repayment Options and Terms

Various repayment options are available to cater to the specific needs of student borrowers. Your loan servicer can provide information on the repayment options for your subsidized vs. unsubsidized loans. Typically, you will have 10 to 25 years to repay your loan, depending on your chosen plan.

If you cannot make your loan payments, it’s important to reach out to your loan servicer immediately. They can assist in maintaining your loan’s good standing. Remember that it can affect your credit score. Options available to you may include changing your repayment plan to reduce your monthly payment or requesting a deferment or forbearance that allows for temporary suspension or reduction of payments.

If you want to cancel some or all of your loans, you must contact your school’s Office of Financial Aid. If you received the loan funds, you still have an opportunity to cancel all or part of it within a specific period. The instructions for canceling your loan are included in the promissory note.

Maximizing Federal Aid and Minimizing Debt

Jumping right into making complex financial decisions that may affect your life in the long run — it’s all very overwhelming. On average, a borrower owes $28,950 in student loans. Beyond subsidized vs. unsubsidized loans, there are a few other options you can take advantage of to maximize federal aid and keep your student debt amount manageable. 

Financial aid for college can come in different forms. Grants and scholarships do not need to be paid back and are the best options available. Work-study programs can be helpful if eligible to earn money for college expenses. Federal student loans are also available but must be repaid with interest. Private loans should only be considered as a last resort.

At Furman University, from scholarships and grants to part-time work, financial help is available to many of our students. As of 2022-2023, 98.6% of Furman students received some type of financial assistance.

We offer more than 100 renewable scholarships to first-year students who demonstrate a strong ability to succeed based on their academic achievements, commitment to the community, passion for leading or exemplary talents.

FAFSA will also provide eligibility for the Federal Pell Grant, Federal Supplemental Educational Opportunity Grant, Federal Work Study, Federal Direct PLUS Loan (for parents), South Carolina Tuition Grant (for in-state residents). Furman also offers student employment opportunities working only a few hours a week.  

The most important tip when considering loans is to create a budget that takes into account your income and then sticking to it. Make sure to include living expenses, a bit of fun money, and any monthly loan payments. Staying on top of payment will help you build a good credit history and help your financial future.

Loan Counseling and Student Resources

If you’re new to student loans, loan counseling or entrance counseling can be highly beneficial and is required. Many college students lack financial experience and often borrow more than necessary. It’s crucial to ensure you only borrow the required amount to cover your expenses. Loan counseling offers tailored guidance and assists you in creating a repayment plan.

By completing entrance counseling, you can ensure that you fully comprehend the terms and conditions of your loan, as well as your rights and obligations. You’ll learn what a loan entails, how interest rates function, your repayment options, and how to prevent falling behind or defaulting. Loan counseling can be a helpful tool in helping you to make informed choices regarding your loans and how to repay if you fall behind. 

Choosing Subsidized vs. Unsubsidized Loans at Furman

Students should carefully consider their financial situation and borrowing needs when choosing between subsidized vs. unsubsidized loans. For eligible students, subsidized loans are the ideal choice as they come with lower interest costs. On the other hand, unsubsidized loans can be a suitable option for those who do not meet the criteria for subsidized loans or require a higher amount.

Financial responsibility is essential for student borrowers. Students should only borrow what they need, and they should make a plan for repaying their loans. Carrying student debt may impact many areas of your life, from buying a home to saving for retirement. You can learn more about Federal Direct Loans at Furman here.

The views and opinions expressed in the Furman Blog are those of the author’s and do not necessarily reflect the official policy or position of Furman University. Any sources cited were accurate as of the publish date.

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