The difference between unsubsidized and subsidized loans

How unsubsidized and subsidized loans compare

There are several types of student loans out there—and until you receive a financial aid package from a college, you may not know what you’re eligible for. Keep these definitions in mind from the beginning and you may be able to save money on your student loans over the long term.

Types of student loans

Student loans can be divided into two general types: federal and private.

Federal student loans (Formerly known as “Stafford” loans) are provided by the government, and to qualify, you need to file a Free Application for Federal Student Aid (FAFSA^®). Federal loans have a standard interest rate—that’s set by the government—and may offer more flexibility in their repayment options than private loans. Types of federal student loans include:

• Direct subsidized loans
• Direct unsubsidized loans
• Direct PLUS Loans, which include Grad PLUS Loans for graduate and professional students, and Parent PLUS Loans, which are lent to a student’s parents. PLUS Loans are the only federal loans that are credit-based.

Private student loans are provided by banks and other financial institutions. They’re credit-based, so you and/or your cosigner need to have good credit. You apply directly from the company that’s making the loan. Private loans often offer fixed or variable interest rates (which can differ from one company to another). Learn how a private student loan works.

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

The main difference difference is who pays the interest while you’re in school—you or the government.

Unsubsidized loans: With an unsubsidized loan, you're responsible for the interest from the moment the amount you borrow is disbursed (sent) to your school. Unlike a subsidized loan, the federal government will not help with interest that accrues. Unsubsidized loans are available to both undergrads and graduate students. When you start paying back your unsubsidized loans, your repayment will include the original amount you borrowed and the interest that has accrued.

Subsidized loans: Federal subsidized loans are based on financial need (as determined by the FAFSA^®). In effect, the government will pay the interest for you while you’re in school (if you’re enrolled at least part-time), during your grace period, and if you need a loan deferment. When you leave school, the government stops paying your loans’ interest. You’ll repay the original amount that you borrowed and the interest that starts to accrue (grow) from that moment. Subsidized loans are only available to undergraduates, and there’s usually a lower loan limit than with an unsubsidized one.

Pro tip: Both unsubsidized loans 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}

So why would anyone ever take out an unsubsidized loan?

As we’ve mentioned, both types of federal loans are only available when you apply for aid through the FAFSA^®.

Subsidized loans are need-based, which means the government will pay the interest. If you qualify for a subsidized loan, you should usually take it, since you can save money with it. If you don’t qualify, however, an unsubsidized loan is the next best thing, offering two advantages:

• You don’t have to demonstrate need for an unsubsidized student loan, 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 package.

Get the money you need for college

If you need to take out a loan to pay for college, know that you’re not alone—according to “How America Pays for College 2023,” by Sallie Mae and Ipsos, 19% of college costs were paid for with borrowed money. And the only way you can apply for federal student loans (both unsubsidized and subsidized) is to file the FAFSA^® every year you’re in school. It’s also the way to apply for grants and work-study.

Another way to get money for college (money that you don’t have to pay back!) is with college scholarships. Scholarship Search by Sallie is free, there's no sign up, and it's an easy way to discover opportunities just for you.

Finally, if you’ve explored scholarships and federal loans and you still need money to pay for school-related costs, 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 achieve the college education—and get your future off to a great start.