The difference between subsidized and unsubsidized loans

Subsidized loans vs unsubsidized loans 

Figuring out the difference between subsidized and unsubsidized student loans is super important when you’re looking at how to pay for college. Let’s break down each type of loan and how they compare.

What are subsidized loans?

Subsidized loans are federal loans available to undergraduate students with demonstrated financial need (as determined by the Free Application for Federal Student Aid, or FAFSA®). The main benefit of subsidized loans is that the government pays the interest while you’re enrolled at least part-time, during your grace period, and if you defer the loan. This means your loan balance won’t grow while you’re not actively repaying it, which can save you money in the long run. The government stops paying the interest when you leave school. You have to repay the original amount that you borrowed plus any interest that starts to accrue (grow) from that moment.

• Eligibility: Only available to undergraduate students with financial need.
• Interest: The government covers the interest while you’re in school, during your grace period, and if you defer the loan.

What are unsubsidized loans?   

Unsubsidized loans are federal loans available to both undergraduate and graduate students, regardless of financial need. You’re responsible for paying the interest from the moment it’s disbursed (sent to your school), including while you’re in school, during your grace period, and during repayment. When you start paying back your unsubsidized loans, your payments will include the original amount you borrowed and the interest that has accrued.

• Eligibility: Available to both undergraduate and graduate students. No financial need required.
• Interest: You’re responsible for paying the interest as it accrues from the moment the loan is disbursed. Interest will grow during school and grace periods, increasing the total amount you owe.

What’s the difference between a federal subsidized and unsubsidized student loan?

The main difference is who pays the interest while you’re in school—you or the government. You’re responsible for paying the interest from the moment your unsubsidized loan is disbursed. On the other hand, the government pays the interest on your subsidized loan while you’re in school and during your grace period.

Both types of federal loans are only available when you apply for aid through the FAFSA®. If you qualify for subsidized loans, accepting them can help you save money. If you don’t qualify, however, an unsubsidized loan is the next best thing, offering two advantages:

• You don’t have to demonstrate need, so you can usually borrow more money.
• You can use the funds to pay for a graduate degree.

Generally, you’ll find out which types of loans you’re eligible for when you receive your school’s financial aid offer.

Note: Both unsubsidized and subsidized loans for undergraduate students have the same interest rate. For loans first disbursed on or after July 1, 2024 and before July 1, 2025, the rate is 6.53%.^{footnote 3}

How to apply for federal loans

Federal student loans (formerly known as “Stafford” loans) are provided by the government. To apply for both subsidized and unsubsidized loans, you need to fill out the FAFSA® every year you’re in school. The FAFSA® is your key to getting all kinds of financial aid for school, like grants, scholarships, and other federal student aid.

Pay for college with confidence

Understanding the difference between subsidized and unsubsidized loans can help you make the best choice for your situation. The only way you can apply for federal student loans is to file the FAFSA® every year you’re in school.

Before taking out a loan, make sure to start with money you won’t have to pay back, like scholarships, savings, and grants. You can freely browse and apply for scholarships based on your background, major, the state you live in, and more with Scholly® Scholarships by Sallie^SM. And if you still need money to pay for school, consider a private student loan.

College is expensive and no one expects you to have planned for everything. Use all the resources you can to get your future off to a great start.