Subsidized vs. Unsubsidized Student Loans: How to Choose the Best Option

If you’re starting to think about paying for college, you’re probably considering your student loan options. Given the high cost of tuition, room and board, and other expenses, it’s unsurprising that 70 percent of students take out federal or private loans to pay for college. When it comes to federal student loans, the debate of subsidized vs. unsubsidized loans is common. Before you choose the best option for your situation and budget, you need to understand the key differences.

What Is the Difference Between Subsidized and Unsubsidized Student Loans?

As you decide between subsidized vs. unsubsidized loans, it’s crucial to know how each option affects the amount of money owed after graduation. If you qualify for a subsidized loan, the federal government will pay the interest accrued on subsidized loans, whereas they won’t for unsubsidized loans.

Subsidized Loans	Unsubsidized Loans
Borrower must demonstrate financial need to qualify	Borrower doesn’t need to demonstrate financial need to qualify
Loan limits are lower compared to unsubsidized loans	Loan limits are higher compared to subsidized loans
The government pays student borrower’s interest accrued during college enrollment	The student is responsible for paying interest accrued during college enrollment
Only undergraduate students are eligible	Undergraduate, graduate, or professional degree students are eligible

How Do I Apply for Subsidized and Unsubsidized Loans?

Before you’re offered subsidized or unsubsidized loans, your financial need and your education level will be taken into account. With both loans, you must be enrolled full-time or half-time in a program that will lead to a degree or certificate at an institution that participates in the Direct Loan Program. You need to fill out an online form called a Free Application for Federal Student Aid (FAFSA). This form will need to be filled out every year that you attend college in order to receive financial assistance.

After you submit your FAFSA, you’ll receive a Student Aid Report (SAR) which will let you know your eligibility. When applying for federal loans, there are certain requirements to keep in mind, including the following:

• You must be a U.S. Citizen or eligible non-citizen
• You must have a valid social security number
• You must have a high school diploma
• You must maintain satisfactory academic progress in college
• You must demonstrate financial need (for most programs)

How Much Can I Borrow with Subsidized and Unsubsidized Loans?

Every year, your university makes the ultimate decision regarding the type of student loan you can receive and the amount you are allowed to borrow. For both subsidized and unsubsidized loans, there are federal limits on how much you can borrow each year. These limits vary based on whether you’re a dependent or independent student and what year you are in school.

Generally speaking, you’re considered a dependent student if you rely on your parents for financial assistance. You will have to report your financial information and your parents’ financial information on the FAFSA. If you’re considered an independent student, your parents aren’t supporting you financially. In this case, you report your own financial information to FAFSA. If you’re married, you’ll also have to report your spouse’s financial information.

How Long Can I Receive These Loans?

You can receive subsidized loans for up to 150 percent of the length of your degree program. For example, if you’re in a four-year program working toward your bachelor’s degree, you can receive subsidized loans for up to six years. (150 percent of four years is six years.) On the other hand, there’s no time limit on unsubsidized loans.

There are also federal limits on how much you can borrow in total over the course of your studies. For most dependent students, the limit is $31,000 with no more than $23,000 of that coming from subsidized loans.

For independent students who are undergraduates, the limit is $57,500, with a limit of $23,000 in subsidized loans. Graduate and professional students have a limit of $138,500, with no more than $65,500 in subsidized loans.

If you reach the aggregate loan limit over the course of your studies, you can’t borrow any more unless you repay some of your loans. Some graduate and professional students who are enrolled in health profession programs are also eligible to borrow more than the limit in the form of unsubsidized loans.

How to Repay Subsidized and Unsubsidized Loans

In general, you should pay back unsubsidized loans before you pay back subsidized loans because interest accrues on unsubsidized loans from the time of disbursement and is added to the principal amount.

The interest on unsubsidized loans likely will have grown substantially by the time you start making payments. Since subsidized loans do not accrue interest while you’re in school or during grace or deferment periods, they should have no interest when you begin repayment.

When it comes time to repay your federal loans, there are several options, including:

• A standard plan that allows you to make fixed payments over 10 years
• A graduated plan that allows you to make smaller payments at first and then increase your payments over time
• A plan that calculates your monthly payments based on your income

You also have the opportunity to apply for a deferment or forbearance that pauses or reduces your payments. If you’re enrolling in graduate school or a rehabilitation program, joining the Peace Corps or active duty military service, or are unemployed, you may qualify for deferment or forbearance.

Finally, in some cases, your loans can be forgiven. For example, if you go into public service, such as working at a nonprofit or teaching, you can qualify for loan forgiveness after 10 years, or after 120 payments.

Federal student loans are not created equal, and it’s important to understand the key differences between them. When you know what differentiates subsidized and unsubsidized loans, you’ll be empowered to know which is right for you so you can establish a budget to cover your interest payments down the line. Be sure to talk to a financial advisor to assess your options.