Subsidized vs Unsubsidized Student Loans: Which is Best for You?

Two young students reading a book in library.
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As of 2022, over half of all college students have taken on student loans to pay their tuition. Future students will likely need loans as well and should understand their options.

Below is everything that college students should know about subsidized versus unsubsidized loans, as well as about which options may be best for them.

What To Know About Student Loans

Neither subsidized nor unsubsidized federal student loans require payments while a student is in school or until the end of an additional six-month grace period after leaving school. Besides that, each type of loan has its differences. Here’s what to know about them. 

What Is a Subsidized Loan? 

A subsidized loan is a type of federal student loan that the government only grants to eligible undergraduate students. 

The interest on these loans is paid by the government while the student is in school and for six months immediately following the student’s graduation, so the amount they owe will only be the principal amount they borrowed.

What Is an Unsubsidized Loan? 

An unsubsidized loan is a type of federal student loan that is available to any undergraduate, graduate or professional student. 

These loans don’t withhold interest, unlike subsidized loans. Instead, once the six-month post-graduation grace period ends, the accumulated interest is included along with the principal in the total amount that the borrower owes.

How Do Subsidized and Unsubsidized Loans Work?

The application process for student loans is fairly simple. Potential borrowers have only to fill out a Free Application for Federal Student Aid form.

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Once that’s completed, their school will notify them of what loans they are eligible for and how much they can borrow. The amount depends on a few different factors: 

  • Tuition and cost of attendance
  • Grade level
  • Status on family’s tax return
  • Parents’ eligibility for a Direct PLUS loan

The factors above also affect the actual amount students are eligible to receive, which may be lower than their annual loan limit

Which Is Better? Subsidized vs. Unsubsidized Loans

Subsidized loans are the more preferable loans for students because of their lack of accrued interest over time.  

Why Is a Subsidized Loan Better Than an Unsubsidized Loan?

Subsidized student loans are better than unsubsidized student loans because the deferred interest on the loan makes it easier for students to pay off their debts after graduation.

Do Subsidized and Unsubsidized Student Loans Have Fees?

All student loans have a loan fee that is a percentage of the loan’s total amount. It is deducted from the borrower’s loan disbursement, or the amount they get each year.

An important thing to note is that all loan disbursements have a loan fee rate of 1.057% until October 1, 2023.

Interest Rates of Subsidized vs. Unsubsidized Student Loans

Subsidized and unsubsidized student loans have fixed interest rates, which means they remain the same throughout the life of the loan. Rates differ according to the education level of the borrower. Here is a chart to show differences in borrowers and interest rates: 

Education Level Interest Rate Loan Type
Undergraduate 4.99% Subsidized and Unsubsidized Student Loans
Graduate or Professional 6.54% Unsubsidized Student Loans
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The above interest rates are for loan disbursements made on or after July 1, 2022, and up until July 1, 2023. 

How Is Interest Calculated for Student Loans?

The amount of interest added to a borrower’s loan every day is calculated by a daily interest formula. The formula includes the outstanding principal balance, the number of days since the borrower’s last payment and the interest payments rate factor, which is the interest rate divided by the number of days in a year. Here is a depiction of the formula:

  • Total Interest = (Outstanding Principal Balance x Interest Rate Factor) x Days Since Previous Payment

How To Repay Subsidized and Unsubsidized Student Loans

Borrowers have several ways to repay their subsidized and unsubsidized student loans. Below is a chart that details all available federal loan repayment plans: 

Types of Repayment Plans Eligible Borrowers Payment and Duration
Standard All borrowers Fixed payment within 10 years (10 to 30 years for consolidation loans)
Graduated All borrowers  Graduated payment within 10 years (10 to 30 for consolidation loans)
Extended Direct loan borrowers with $30,000 in outstanding loans Fixed or graduated payment within 25 years
Revised Pay As You Earn (REPAYE) Direct loan borrowers with eligible loan type Monthly payments of 10% of discretionary income within 20 to 25 years
Pay As You Earn (PAYE) New borrower after Oct. 1, 2007, and received a disbursement of a Direct loan after Oct. 1, 2011 Monthly payments of 10% of discretionary income
Income-Based (IBR) Borrowers with high debt relative to income Monthly payments of 10% to 15% of discretionary income within 20 to 25 years
Income-Contingent (ICR) Direct loan borrower with eligible loan type Monthly payments below 20% of discretionary income or fixed payments within 12 to 25 years, adjusted for income
Income-Sensitive Only for FFEL program loan borrowers Monthly payments based on annual income within 15 years
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Is It Better To Pay Subsidized or Unsubsidized Loans First?

Paying off unsubsidized loans first will save borrowers more money over time. Also, because interest continues to accrue on unsubsidized loans, these loans are more urgent to pay off. 

Do You Have To Pay Back Subsidized Loans?

During school and for six months after leaving, borrowers are not required to make any payments on the interest or principal of their subsidized loans. After the six-month grace period ends, then they must make payments on the loan.  

Final Take

In considering whether subsidized vs. unsubsidized loans are better, the clear choice is subsidized loans. They don’t carry the burden of mounting interest payments, whereas unsubsidized loans do. 

However, subsidized loans are only available for eligible undergraduates. Non-eligible undergraduates, graduates and professional students should learn as much as possible about student loans in order to manage their student debts effectively.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.


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