What Are Subsidized Loans?
Direct Subsidized Loans are federal student loans available to undergraduate students who demonstrate financial need. Your financial need is determined by the information you provide on the Free Application for Federal Student Aid (FAFSA).
The most important feature of a subsidized loan is the interest subsidy: while you are enrolled at least half-time, during your six-month grace period after leaving school, and during qualifying deferment periods, the U.S. Department of Education pays the interest that accrues on the loan. This means you are not responsible for paying that interest, and it does not get added to your principal balance.
What Are Unsubsidized Loans?
Direct Unsubsidized Loans are federal loans available to undergraduate, graduate, and professional students without regard to financial need. Because there is no need-based requirement, any eligible student can borrow an unsubsidized loan up to the annual limits.
Unlike subsidized loans, you are responsible for all interest that accrues on an unsubsidized loan from the date of disbursement, even while you are in school, during your grace period, and during deferment. If you choose not to pay the interest as it accrues, it will be capitalized (added to the principal balance), which increases the total amount you owe over time.
Key Differences in Interest Accrual
The critical difference between subsidized and unsubsidized loans is who pays the interest that accrues during periods when you are not required to make payments. The table below summarizes the main differences.
Remember that even though the government pays the interest on subsidized loans during eligible periods, you are still responsible for repaying the principal amount you borrowed.
| Period | Subsidized Loan | Unsubsidized Loan |
|---|---|---|
| In school (at least half-time) | Government pays interest | Borrower responsible for interest |
| Grace period (first 6 months after leaving school) | Government pays interest | Borrower responsible for interest |
| Qualifying deferment | Government pays interest | Borrower responsible for interest |
| Other periods (e.g., forbearance, repayment) | Borrower responsible for interest | Borrower responsible for interest |
Award Amounts
Subsidized loans are available only to undergraduate students who demonstrate financial need. Unsubsidized loans are available to all eligible undergraduate, graduate, and professional students, regardless of financial need.
The amount you can borrow each year is subject to annual and aggregate (total) loan limits, which depend on your year in school and whether you are a dependent or independent student. The tables below show the annual limits for dependent and independent undergraduate students, as well as the aggregate limits.
| Year | Total Limit (Subsidized + Unsubsidized) | Maximum Subsidized Amount |
|---|---|---|
| First year | $5,500 | $3,500 |
| Second year | $6,500 | $4,500 |
| Each subsequent year | $7,500 | $5,500 |
Sources: Federal Student Aid, SUNY Potsdam
Annual Limits for Independent Undergraduates and Aggregate Limits
Independent undergraduate students (or dependent students whose parents are unable to obtain a PLUS Loan) have higher annual loan limits. The table below shows these limits.
In addition to annual limits, there are aggregate limits on the total amount you can borrow across all years. For dependent undergraduates, the total combined limit for subsidized and unsubsidized loans is $31,000, of which no more than $23,000 may be in subsidized loans. For independent undergraduates, the total combined limit is $57,500, with the same $23,000 cap on subsidized loans.
| Year | Total Limit (Subsidized + Unsubsidized) | Maximum Subsidized Amount |
|---|---|---|
| First year | $9,500 | $3,500 |
| Second year | $10,500 | $4,500 |
| Each subsequent year | $12,500 | $5,500 |
Sources: Federal Student Aid
Which Loan Should You Consider First?
Because a subsidized loan offers the benefit of an interest subsidy while you are in school and during qualifying periods, it is generally more affordable than an unsubsidized loan. If you are an undergraduate who demonstrates financial need, you should consider subsidized loans first.
After you have received the maximum subsidized amount you are eligible for, you may consider an unsubsidized loan to cover remaining educational expenses. For graduate and professional students, only unsubsidized loans are available.
Impact on Total Repayment: An Example
This amount would be added to your principal if unpaid, meaning you would repay interest on the accrued interest as well.
This example illustrates how the interest subsidy can significantly reduce your total cost. Actual amounts will vary based on interest rates and how often interest is capitalized.
Note that this example does not include the loan origination fee, which is a percentage of the loan amount deducted from the disbursement.
Sources: Federal Student Aid, Furman University, Northern Kentucky University
Frequently asked questions
When does interest start accruing on unsubsidized loans?
On unsubsidized loans, interest begins accruing from the date the loan is disbursed, including while you are in school, during your grace period, and during deferment. You are responsible for all interest that accrues, even if you do not make payments during those periods.
Sources: Federal Student Aid, Northern Kentucky UniversityAre subsidized loans available to graduate students?
No, Direct Subsidized Loans are available only to undergraduate students. Graduate and professional students are not eligible for subsidized loans, but they may borrow up to $20,500 per academic year in Direct Unsubsidized Loans.
Sources: Federal Student Aid, Northern Kentucky UniversityWhat happens to the interest subsidy if I drop below half-time enrollment?
If you drop below half-time enrollment, you typically enter your grace period for your subsidized loans. The government continues to pay the interest on your subsidized loans during the six-month grace period. After the grace period ends, you become responsible for interest, but you may be eligible for deferment or forbearance, which may allow the government to continue paying interest on subsidized loans during certain types of deferment.
Sources: Federal Student Aid, Northern Kentucky UniversitySources
- Subsidized and Unsubsidized Loans - Federal Student Aid — Federal Student Aid
- Subsidized vs. Unsubsidized Loans: What's the Difference? — Furman University
- Federal Student Loan Options for Undergraduate Students - SUNY Potsdam — SUNY Potsdam
- Subsidized vs Unsubsidized Loans: Key Differences — Northern Kentucky University