Understanding Subsidized Versus Unsubsidized Loans
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When you think about taking out student loans, you probably imagine that there are only two different types: federal and private.
However, there are more categories than that. Within federal student loans, there are actually two main subtypes: Direct Unsubsidized Loans and Direct Subsidized Loans. And while they sound similar, knowing the difference between these two loans is important.
Curious to see how they compare? Keep reading to understand which type is better, how to qualify for either and if there are other federal options.
Direct Unsubsidized Loans vs. Direct Subsidized Loans
Application Process
The application for both Direct Unsubsidized Loans and Direct Subsidized Loans is the same. To qualify for either, students must fill out the Free Application for Federal Student Aid (FAFSA) to potentially qualify for both Direct Unsubsidized Loans and Direct Subsidized Loans.
When you complete the FAFSA, the Department of Education will assign you a Student Aid Index (SAI) number that represents your financial need. Only students with demonstrated financial need will qualify for Direct Subsidized Loans. All other students will qualify for Direct Unsubsidized Loans. Once students have maxed out their Direct Subsidized Loans, they can take out Direct Unsubsidized Loans.
Your SAI can change from year to year, depending on your family’s financial circumstances. Just because you did not qualify for Direct Subsidized Loans previously doesn’t mean you’ll be ineligible in the future.
Availability
There is no limit to how many students may qualify for either Direct Unsubsidized Loans or Direct Subsidized Loans. As long as you meet the school’s financial aid deadline and fulfill general eligibility requirements for the FAFSA, you will receive those loans.
Dollar Limit
Unfortunately for students, the annual and aggregate limit for Direct Subsidized Loans is lower than the annual and aggregate limit for Direct Unsubsidized Loans. The limit also depends on if you’re classified as a dependent or independent student.
Dependent students are those who are still receiving financial support from their parents. To be classified as an independent student, you must meet one of the following criteria:
- 24 or older
- Married
- Attending a professional or graduate school
- Veteran or current member of the military
- Orphan or a ward of the court
- Have legal dependents other than a spouse
- Emancipated minor
- Homeless or at risk of becoming homeless
For undergraduate dependent students, the aggregate limit is $23,000 for Direct Subsidized Loans and $31,000 for Direct Unsubsidized Loans. Graduate and professional students are only eligible for Direct Unsubsidized Loans, even if they have financial need. Graduate students have a $138,500 aggregate limit for Direct Unsubsidized Loans.
Here’s how the limits break down per school year:
| Year in school and annual limit | Direct Subsidized Loans | Direct Unsubsidized Loans for dependent students | Direct Unsubsidized Loans for independent students |
| First-year undergraduate | $3,500 | $5,500 | $9,500 |
| Second-year undergraduate | $4,500 | $6,500 | $10,500 |
| Third-year undergraduate and higher | $5,500 | $7,500 | $12,500 |
| Graduate student | Not available | $20,500 per year | $20,500 |
Interest Rates
For undergraduate students, Direct Unsubsidized Loans and Direct Subsidized Loans have the same interest rate. Graduate students are only eligible for Direct Unsubsidized Loans, which have a different interest rate than the rate for undergraduates’ Direct Unsubsidized Loans.
Federal student loans also come with an origination fee, which is 1.057% for both Direct Unsubsidized Loans and Direct Subsidized Loans.
Interest Accrual
The biggest difference between Direct Unsubsidized Loans and Direct Subsidized Loans is that interest will not accrue on Direct Subsidized Loans while you’re in school or during any deferment periods.
For example, If you go back to graduate school, you can put your loans in deferment. If you have Direct Unsubsidized Loans, you will still accrue interest during this time. However, if you have Direct Subsidized Loans, you will not accrue interest.
If you do not qualify for deferment, you can still be eligible for loan forbearance, which will also pause your loans’ payments temporarily. You will still accrue interest though during forbearance with both Direct Subsidized Loans and Direct Unsubsidized Loans.
Repayment Process
Both Direct Unsubsidized Loans and Direct Subsidized Loans are eligible for the same types of repayment plans, including income-driven repayment plans. They are also both eligible for forgiveness plans, including Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness and income-driven repayment forgiveness.
Direct Unsubsidized Loans
Pros
- Don’t need to have demonstrated financial need to qualify
- Available for graduate and professional students
- Higher maximum annual and aggregate loan amount
Cons
- Interest will accrue during both deferment and forbearance
Direct Subsidized Loans
Pros
- Interest will not accrue during deferment
Cons
- Harder to qualify for
- Lower annual limit than other loans
- Only available for undergraduate students
Other Types of Federal Student Loans
Direct Unsubsidized Loans and Direct Subsidized Loans are the most common types of federal student loans. However, they’re not the only available loan options. Here are the other types of student loans you can take:
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Direct Consolidation Loan
Once you graduate or leave school, you can consolidate your loans into a single Direct Consolidation Loan. A Direct Consolidation Loan will not have a lower interest rate; instead, it will average your Direct Unsubsidized Loans and Direct Subsidized Loans’ rates.
When you consolidate student loans, you may wind up paying more interest in the long run because Direct Consolidation Loans often have longer repayment terms. It is important to do your math before you jump into a decision.
Graduate PLUS Loan
Graduate students who have maxed out their Direct Unsubsidized Loans and Direct Subsidized Loans can take out a Grad PLUS Loan. These loans have a much higher annual limit at 100% of the cost of attendance minus any other financial aid.
Parent PLUS Loan
A Parent PLUS Loan is given to a parent of an undergraduate student. Like Grad PLUS Loans, these loans have higher annual limits than Direct Unsubsidized Loans and Direct Subsidized Loans. The limit is the cost of attendance minus any other financial assistance.
Parent PLUS Loans have higher interest rates than either Direct Unsubsidized Loans and Direct Subsidized Loans. These loans also have less access to income-driven repayment plans.
To qualify for a Parent PLUS loan, the federal government will run a credit check. While there is no minimum credit score, you may be denied if you have a major negative event on your credit report.
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