Subsidized vs. Unsubsidized Loans

Key Takeaways:

  • A subsidized student loan is a loan for undergraduate students who show financial need.
  • An unsubsidized loan is a federally guaranteed student loan that is offered to students who lack financial resources to study.
  • Subsidized loans offer better repayment terms than unsubsidized loans.
Author  Kimberley Smyth
Reviewed by  Ross Loehr
Last updated: July 20, 2022
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Both subsidized and unsubsidized loans are federal student loans offered with the intention that the funds will be used to pay for college. They are a part of the federal direct loan program through the U.S Department of Education.

The difference between subsidized and unsubsidized student loans is that a subsidized loan offers better repayment terms and is intended to help students in financial need.

Subsidized Loans Explained

A subsidized student loan, also known as a Stafford subsidized loan, is a loan for undergraduate students who show financial need.

Note: The benefit of a subsidized loan is that it does not accrue interest like an unsubsidized loan.

The government covers interest costs temporarily while the student is enrolled in school or while the loan is deferred.

There is also a six-month grace period of loan deferment from when the student leaves school that does not require repayment.

Who Can Qualify for a Subsidized Loan?

To qualify for a subsidized loan, you need to fill out the Free Application for Federal Student Aid Form (FAFSA).

The amount you can borrow will depend on your financial need and is determined by the school you attend.

You must be enrolled at least half-time in an undergraduate program.

The program can be from participating universities, community colleges, or trade, career, or technical schools.

>>For more information, you can read the Student Guide requirements here.

How Do the Terms of Subsidized Loans Work?

There are different maximum loan amounts starting at $5,500 annually, and this varies, which depends on your dependency, grade level, and attendance cost.

>> Find out more about annual loan limits here.

Loan terms are for a maximum of 30 years, and payments occur monthly or quarterly. The loans do offer a 6-month grace period from the time you finish, drop out or drop under half-time study.

The interest rates for unsubsidized student loans are variable; however, they will not exceed 8.25%. Subsidized student loan interest rates are adjusted annually on July 1st.

Along with interest on a subsidized loan, you will pay a fee of up to 4% of the loan amount.

>>Find the current interest rate for subsidized student loans here.

Although subsidized loans are cheaper than unsubsidized loans, they may still carry a somewhat high interest rate.

At, we recommend shopping around for cheaper loan alternatives at more competitive interest rates and fees.

Unsubsidized Loans Explained

An unsubsidized loan is also known as a Stafford unsubsidized student loan.

It is also a federal loan, however unlike a subsidized loan it is available to undergraduate and graduate students.

Note: An unsubsidized loan is different from a subsidized loan in that students  are not required to show a financial need.

Interest accrues on the unsubsidized loan even while the student is attending school.

This may end up costing the student more money overall if they do not pay the accrued interest while in school, and during the grace period. All the interest gets added to the loan amount.

So you will then have to pay interest on a higher loan amount when you begin your loan payments.

Who Qualifies for An Unsubsidized Loan?

You do not have to prove financial need or have a credit history to get an unsubsidized student loan.

A big benefit of an unsubsidized loan is that you can apply for one once you have reached your borrowing limit with a subsidized loan. This offers a way to help pay for the remainder of your college expenses if the subsidized loan is not enough.

Note: Undergraduate and graduate students can apply for an unsubsidized loan.

No credit check is required. However, you must not have any loan defaults or owe refunds to any student loan or student aid.

Each student must be a U.S. citizen or permanent resident to be eligible.

 How Do the Terms of Unsubsidized Loans Work?

There is a limit to how much you can borrow from an unsubsidized loan.

Each school or educational institute will determine how much you can borrow based on your school year and dependency status.

Loans for graduate education tend to carry a higher interest rate than undergraduate loans.

The fees for unsubsidized loans are percentage-based and are deducted proportionately from each loan payment.

Different payment plan options are ranging from 1025 years.

>>Find the list of repayment plans here.

Most unsubsidized student loan repayment plans aim to help students repay their student debt within 10 years of graduation.

Interest accrues from the day the loan is issued. It is recommended to pay the loan’s interest while in school and the grace period before beginning principal loan repayments.

If you do not repay the interest, it gets added to the total amount of your loan.

Many students who need more financial help with college consider private student loans, personal loans, or consolidation loans if they have a good credit score.

It’s essential to find the right loan with the lowest overall interest and fees. helps you connect with multiple trusted lenders all in one place.

Subsidized vs Unsubsidized Student Loans: Which One Should You Get?

Who Can ApplyUndergraduate StudentsUndergraduate & Post Graduate Students
When Does Student Pay Interest?6 months after graduationAccrues from loan acceptance
Qualifying CriteriaMust prove financial need through the applicationNo financial need is required but must not have another student loan in default
Annual Borrowing LimitsUp to $5,500 a year per dependentUp to $20,500

At, we recommend obtaining the least amount of debt with the cheapest fees possible.

When it comes to subsidized vs unsubsidized loans, we recommend choosing a subsidized loan over an unsubsidized loan, should you qualify.  

Neither subsidized nor unsubsidized student loans do not require a credit score.

Student loans can help you build a credit history. This will help with future borrowing for items such as a mortgage, car loan, or personal loan.

Once you have completed your studies and are hopefully in a higher-paying job, it is then recommended to shop around and look for a lower fee loan that will enable you to pay off more principal in a shorter period of time.

This can be accomplished online with a personal loan that offers competitive rates or a consolidation loan.

Student loans can also help build your credit score. If you are paying down principal as well as making your interest payments, your debt-to-income ratio will be continue to improve.

This comes in handy for when you purchase a home or take other steps on your financial journey.

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AuthorKimberley Smyth

Kimberley is the US Country Manager for She has gained years of experience in small business management and has two successful start-ups under her belt. She now focuses her energy on helping others achieve financial freedom through smart money management and investment opportunities.

Financial information reviewed byRoss Loehr - CFP®, MBA
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