If you take out federal student loans to pay for college, they will fall into one of two broad categories: subsidized or unsubsidized. The major difference between the two is that Direct Subsidized Loans don’t charge borrowers interest during certain periods of deferment, like while you’re enrolled in school. Direct Unsubsidized Loans charge interest during all periods.

Subsidized vs. unsubsidized loans

Both Direct Subsidized and Direct Unsubsidized Loans are part of the federal Direct Loan Program. When you submit the Free Application for Federal Student Aid (FAFSA), your school sends you a financial aid award letter that explains what you qualify for and how much you can borrow.

Here’s how subsidized and unsubsidized student loans work:

Direct Unsubsidized Loans
Direct Subsidized Loans
Who pays interest costs? The borrower The U.S. Department of Education while the student is enrolled, during grace periods and during deferment. The borrower during repayment and forbearances.
What’s the aggregate maximum limit? Dependent undergraduate students: $31,000
Independent undergraduate students: $57,500
Graduate students: $138,500
Undergraduate students (dependent and independent): $23,000
What do you need to qualify? Does not require proof of financial need Must demonstrate financial need
Who can borrow? Undergraduate students, graduate students and professional degree students Undergraduate students
Are there extra costs involved? Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2022 Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020, and before Oct. 1, 2022
What is the maximum eligibility period? No limit No limit for first-time borrowers on or after July 1, 2021

What is a subsidized loan?

A Direct Subsidized Loan is a type of federal student loan that undergraduate students can receive by showing financial need. They’re less expensive than Direct Unsubsidized Loans because interest doesn’t accrue on them during certain time frames. The U.S. Department of Education pays interest on subsidized loans while the borrower is enrolled at least half time in school, during a six-month grace period after graduation and during other deferment periods.

Your school decides how much you can borrow based on the cost of attendance, your demonstrated financial need, your year in school and any other financial aid you receive. You can borrow a maximum of $23,000 in Direct Subsidized Loans over the course of your education, though limits cap out at $5,500 a year. Graduate and professional students can’t borrow subsidized loans.

The federal government sets federal student loan interest rates, and the rates may change each school year. For the 2021-22 academic year, undergraduate students have a 3.73 percent interest rate on Direct Subsidized Loans. For 2022-23, this will rise to 4.99 percent.

What is an unsubsidized loan?

A Direct Unsubsidized Loan is a type of federal student loan that starts accruing interest as soon as money is disbursed to your school. You may choose not to pay this interest while you’re in school and during your six-month grace period, but any unpaid interest that accumulates during this time will be added to your total balance.

Dependent students can borrow a total of $31,000 in combined unsubsidized and subsidized loans, while independent undergraduate students can borrow up to $57,500 total. Graduate or professional students can borrow a total of $138,500 in Direct Unsubsidized Loans, including any undergraduate loans. Medical school students can borrow up to $224,000 in Direct Unsubsidized Loans.

Direct Unsubsidized Loans for undergraduates have a 3.73 interest rate for the 2021-22 school year and a 4.99 percent interest rate for the 2022-23 school year. Direct Unsubsidized Loans for graduates have a 5.28 percent interest rate for 2021-22 and a 6.54 percent interest rate for 2022-23. Unlike with subsidized loans, you do not have to demonstrate financial need to qualify for unsubsidized loans — these loans are open to all borrowers who are able to receive federal aid.

Which is better: Subsidized or unsubsidized loans?

Subsidized loans are the best first choice for borrowers; since the federal government covers the interest that accrues on your loans, it’s less money for you to pay out of pocket. This is especially true for borrowers who are unable to make interest payments while they’re in school.

However, some borrowers cannot demonstrate the financial need necessary to qualify for this type of loan, leaving unsubsidized loans as the only option. Unsubsidized loans are still worth considering — while interest will accrue immediately, these loans still have low interest rates and benefit from federal protections like the COVID-19 forbearance period.

Should I take out federal or private student loans?

As you consider how to pay for college, it’s wise to take advantage of any grant or scholarship opportunities available to you before you start to look at financing options. If you do have to borrow money, it’s almost always best to start with federal loans. These loans come with many benefits unique to the federal government, like income-driven repayment plans, long forbearance and deferment periods and loan forgiveness options.

If grants, scholarships and federal loans don’t cover your costs, you may need to stack on private student loans to finance the remaining balance. Private student loans often have higher interest rates if you or your co-signer have average credit, and they don’t offer the same benefits as federal loans. With that said, private student loans can be a useful tool if you’ve hit the loan maximum on federal loans or if you have exceptional credit.

How to apply for a federal student loan

If you’ve run the numbers and determined that you need to borrow money for college, the process of applying for a federal loan is fairly simple:

  1. Make sure you’re eligible. You’ll need to be a U.S. citizen, permanent resident or eligible noncitizen, have a high school diploma or GED certificate and plan to be enrolled at least half time in school.
  2. Fill out the FAFSA. The Free Application for Federal Student Aid is how your school determines what financial aid you qualify for. You’ll need your Social Security number or Alien Registration Number, federal income tax returns, pay stubs or other records of how you earn money, as well as bank statements and records of investment accounts. If you’re applying as a dependent, your parents will need to supply this information as well.
  3. Wait for your award letter. Most schools that accept you for admission will send you a financial aid award letter listing your total cost of attendance, the award money you’ve been given and what federal aid programs you qualify for based on your FAFSA information. From here, you can choose to accept federal student loans in addition to any grant or work-study awards. If you don’t receive an award letter but you need to take out an unsubsidized loan, reach out to your financial aid office.

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