Here’s the Difference Between Subsidized and Unsubsidized Loans

Learn about subsidized versus unsubsidized student loans.

Subsidized and unsubsidized loans are types of student loans backed by the federal government to help college students finance their education at low rates of interest. In addition to low interest, these types of loans offer benefits such as fixed interest rates, flexible repayment plans and tax-deductible interest. When you need assistance paying for school expenses, it’s helpful to know your options for federal student aid.

Here’s what you need to know about subsidized and unsubsidized student loans:

What Is a Direct Subsidized Loan?

A subsidized loan — or direct subsidized loan — is a loan that the U.S. Department of Education pays the interest on in the following situations:

  • While attending school (at least half-time).
  • For the first six months after you leave school.
  • During a time when you’ve postponed your loan payments.

The exception to this rule applies to subsidized student loans that were first disbursed between July 1, 2012, and July 1, 2014. Loans disbursed during this period will accrue interest during the grace period; the interest must be paid or it will be added to your loan’s principal balance.

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Undergraduate students who can demonstrate financial need are eligible for subsidized loans. The school that you attend is responsible for determining the loan amount, which cannot exceed your financial need.

FAFSA Application: How to Apply for Federal Student Aid

What Is a Direct Unsubsidized Loan?

Both undergraduate and graduate students are eligible for unsubsidized student loans and neither category of students has to prove financial need. The school you attend determines your loan amount by considering your cost of attendance and the amount of other financial aid you receive.

Interest accrues on a direct unsubsidized loan at all times — both when you’re in school and during grace, deferment or forbearance periods. You can choose not to pay the interest while you’re attending school, during the grace period or any other postponement period, but the interest will accumulate and be added to the principal balance of your loan.

What’s the Difference Between Subsidized and Unsubsidized Loans?

These two types of financial tools are distinct in a couple ways. Here are the differences between subsidized and unsubsidized loans:

  • Who can apply: Both undergraduate and graduate students can apply for unsubsidized loans; subsidized loans are only available for undergraduates.
  • Who they’re granted for: Subsidized loans are granted based on students’ financial need; unsubsidized loans are granted without regard to financial need.
  • How interest works: It’s possible to temporarily stop interest from accruing on a subsidized loan but interest always accumulates on an unsubsidized loan.
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How Subsidized and Unsubsidized Student Loans Work

Once you apply for a subsidized or unsubsidized student loan, your school will determine how much you are eligible to receive. Limits vary and depend on what year you are in school and whether you are a dependent or independent student, according to the Office of Federal Student Aid. Although annual loan limits do exist, the actual loan amount you receive might be less than the annual limit.

Student Loan Fees

Both direct subsidized and unsubsidized loans have a loan origination fee that is a portion of the total loan amount. You will not receive the full amount of your loan because this fee will be subtracted from your balance before the loan is disbursed to you.

Loans disbursed between Oct. 1, 2017, and Oct. 1, 2018, are subject to a fee of 1.066 percent.

Student Loan Interest Rates

Here are the interest rates for loans disbursed between July 1, 2017, and July 1, 2018:

  • Subsidized: 4.45 percent
  • Unsubsidized undergraduate loans:  4.45 percent
  • Unsubsidized graduate loans: 6 percent
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Interest rates are fixed for the entire life of subsidized and unsubsidized loans.

How Interest on Student Loans Is Calculated

A simple daily interest formula is used to calculate the amount of interest added to your loan. According to Office of Federal Student Aid, your student loan interest rate is found by multiplying your outstanding principal loan balance by the number of days since your last payment times the interest rate factor.

The interest rate factor is figured by dividing your loan’s interest rate by the total number of days in the year.

Find Out: FAFSA Deadline: The 2018 Dates You Need to Know When Applying for Financial Aid

Student Loan Repayment

After leaving school or dropping below half-time status, your loans will enter a six-month grace period before repayment is required. You’ll receive notification from your loan servicer during this period to inform you when your first payment will be due. Payments are usually due monthly.

Before applying for student aid, it helps to have a clear understanding of your options and all that they entail so that you can make the best financial decision. Although getting an education is a benefit of receiving funds to pay for it, having to pay back more than necessary is not.

Up Next: 7 Types of Student Loan Forgiveness

About the Author

Cynthia Measom

Cynthia Measom is a personal finance writer and editor with over 12 years of collective experience. Her articles have been featured in MSN, Aol, Yahoo Finance, INSIDER, Houston Chronicle, The Seattle Times and The Network Journal. She attended the University of Texas at Austin and earned a Bachelor of Arts degree in English.

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