Difference between Federal Subsidized and Unsubsidized loans

Learn all about the differences between Federal direct subsidized and unsubsidized loans, repayment plans, interest rates, eligibility, loan period and more. We have it all covered here in this article

Updated by Sharan Kumar on 18th September 2019

Federal student loans are those loans we get from the federal government or where the federal government is considered the lender. Here the loans are given out from the government but there are a couple of differences between the two types of loans and we shall discuss them below in the article.

I’ll just highlight a few differences in the table below so as to give a rough idea as to what applies to you and what would be best for you.

Table of Contents 

What is a Federal Direct Subsidized student loan?

Federal student loans that are made to eligible students to help finance a higher education are the general category under which direct subsidized federal loans fall under.

The term "Subsidized" just means to say that the eligible borrower will not be charged or be obligated to pay the interest that is charged on the subsidized part of their federal student loan for the time that they are enrolled at a participating institution for at least a half of the time of the program.


What is a Federal Direct Unsubsidized Loan?

A Direct Unsubsidized Loan is a federally guaranteed loan that is specifically designed to help you if you are in financial need but lack the financial resources to enroll in a college program.

The loan amount is decided by the school you want to attend and the amount varies between schools and different programs.

The loan approval does not need proof of financial need and can be received by you even if you have a good financial background.

The interest on the loan begins accumulating immediately after the loan is disbursed.

You do not have to begin repaying the loan until after graduation and up-to a grace period of 6 months.

The whole loan must be repaid by you but in certain circumstances, it maybe is forgiven may be discharged if requested.


Federal Subsidized Vs Unsubsidized Student Loans

Direct Unsubsidized Loans are the loans offered to eligible undergraduate, graduate, and professional students, but eligibility is not based on financial need.

It is a loan which is meant for those who do not qualify under the requirements of financial need but still require help in paying for their schooling expenses.

Direct Subsidized loans are offered on need-based to the students. It is also offered to the eligible undergraduate students. 

As we reach the repayment phase, the interest payments starting coming into concern. Getting approved for a subsidized loan is harder but it is worth giving a shot.

General factors of comparison of both the types of federal loans are given below. 

Factors Direct subsidized Direct unsubsidized
Loan period Up to 150% of school term Up to 150% of school term
Interest rate 5.05% 5.05% for undergraduates 6.6% for the rest
Applicable to Undergrads only Undergrads, Grads, and Professionals
The necessity of financial need Yes No
Repayment Interest paid by the government during school and grace period. Interest to be paid by the borrower at all times
The amount that can be borrowed Low and differs depending on the year and level of study Higher than Subsidized loans, also differs from year and level of study.

As we reach the repayment phase, the interest payments starting coming into concern. Getting approved for a subsidized loan is harder but it is worth giving a shot


Eligibility and Requirements for Direct Unsubsidized and Direct Subsidized Loan

You must fulfill the following criteria - 

  • Any US citizen or non-citizens who qualify, or permanent residents of the United States of America.

  • Must meet the general eligibility criteria of federal student aid.

  • Currently enrolled in a degree or certificate awarding program.

  • Was enrolled for half time at least, in a school that participates in the Direct loan program.

  • Must maintain satisfactory academic progress.

  • Received a High school diploma or an equivalent certificate.

  • Not in default of any current Federal student loans.

  • Post-baccalaureate students must petition for eligibility.

Direct subsidized loans are provided only to those undergraduate students who are in financial need. .


How to apply for a Direct Subsidized and Direct Unsubsidized student loan

The process of applying or borrowing a Direct Subsidized Loan and a Direct Unsubsidized loan is explained below.

1 - Fill and file the FAFSA/Free Application for Federal Student Aid, this info will be used by your school's financial aid office to see if your eligible and how much you can borrow.

Usually, the loan and the amount that you may be eligible to borrow will be included in the financial aid award letter your school provides to you. You will not be allowed to borrow more than your financial need or the max amount that is allowed for your level of study. 

2 - Make a note that "Subsidized" is a variation of the Direct student loan that has a fixed interest rate and no payment or accumulation of interest while the borrower is still attending school for more than half the time. Payment will not be started until you leave school or stop attending at least half time.

3 - If your school finds that you do not qualify for a subsidized loan due to the lack of financial need but are instead eligible to receive financial aid, they should include an offer letter of an unsubsidized student loan award letter instead.

4 - Sometimes you might have a loan in which part of it is subsidized and the other becomes unsubsidized. In any case, the loan limits of how much you may borrow will apply to the total amount of Subsidized and Unsubsidized loans that you borrow.

5 - Contact the Financial Aid Office at your school and accept the financial aid including student loans.

6 - Sign the necessary paperwork which will include a Master Promissory Note (MPN).


Direct Subsidized and Unsubsidized student loan interest rates

For all Direct Subsidized and Unsubsidized loans that were disbursed between the dates of July the 1st of 2018-19 the interest rates for Undergrads is 5.05% and for those Graduates and professionals there are not Subsidized loans but Unsubsidized loans are having interest rates of about 6.6%.

These are all fixed rates as they are given out by the federal government.


The Direct Subsidized and Direct Unsubsidized student loan fee

The fee that is charged for loans that are disbursed after the date of 1st Oct 2017 and before Oct 1st, 2018 is 1.066% and for those that are disbursed after the date of 1st of Oct 2018 and before 1st of Oct 2019 is 1.062% is the loan fees. The loans disbursed prior to the time periods mentioned here have a different origination fee.

These fees are deducted from the amount that is further sent over to the borrower and hence must be taken into calculation while applying for the loan.

For example, for someone borrowing in the time period after the 1st of Oct 2018 and before the 1st of Oct 2019 the amount received will be 98.938% of the loan amount. Payments will begin after a period of 6 months post-graduation or if you cease to be enrolled for at least half of the period of the course or program.


Direct Subsidized and Unsubsidized Loan Borrowing Limits

The amount you can loan from the Direct Loans program is subject to annual loan and aggregate loan limits.

Annual loan limits specify how much of loan can you get each academic year and

Aggregate limits (also called cumulative limits) mention how much you can borrow throughout the loan program.

So if you are allowed to borrow up to $5,000 per year for a period of 4 years. The annual loan limit would be $5,000 and the aggregate limit would be $20,000, but these are just for example the real numbers may vary according to the term and the amount that is allotted to be borrowed.

The max loan amount you may receive is defined by your level of study as mentioned below:

$5,500 for a first-year student who is enrolled in a program of study that is at least for a full academic year of which no greater than $3,500 can be a subsidized loan.

$6,500 for a student who has completed the first year of study and the remaining program is at least another full academic year of this there can be no more than $4,500 as a subsidized loan.

$7,500 for a student who has completed 2 years of studies and the remaining program is at least another full academic year of which no more than $4,500 can be subsidized loan.

If in such an instance you are an independent undergrad student or a dependent student whose parents have applied for a direct PLUS loan for parents in such an instance you are able to borrow up to -

$9,500 for a student who is here for the first year in a program of study which lasts for at least a full academic year of this amount no more than $3,500 can be a subsidized loan.

$10,500 for a student who has completed their first year of study and the remaining program consists of at least a full academic year of which no more than $4,500 can be as a subsidized loan.

$12,500 for a student who has completed 2 years of study and the remaining program or duration of study is a full academic year of which no more than $5,500 can be as a subsidized loan.


What about student loan repayment?

Well, the usual repayment duration on Direct Loans is about 10 years.

However, you can become eligible for a longer repayment term if you decide to consolidate the loans or have more than $30,000 in federal student loans. 

Eligible Repayment plans 

The loan repayment is scheduled to begin 6 months after you graduate from school although the interest accumulates from the time the loan is first disbursed this is called the Direct Unsubsidized loan grace period.

Repayment Plans  
Standard Repayment Extended Repayment
Graduated Repayment Revised Pay As You Earn Repayment ( REPAYE)
Pay As You Earn Repayment (PAYE) Income-Based Repayment (IBR)
Income-Sensitive Repayment Income Contingent Repayment (ICR)

Direct Unsubsidized loans qualify for all of the different repayment plans offered by the U.S. Department of Education.


Where do my funds go?

The funds will be sent to your school account once the loan is approved and they arrive in the following order.

  • Tuition fees

  • Room and Boarding

  • Other school charges (with your approval)

The funds can usually be used for the following - 

  • Books for the program

  • Supplies required in the duration of the program

  • Equipment required for the program

  • Transportation to and from the place of stay to the school

  • Miscellaneous personal expenses

Do bear in mind the loan limits are capped at the school's annual cost of attendance and cannot exceed the same.

As in the loan amount per year may not exceed the total cost of attendance quoted by the school for the program which you shall be attending.

Any excess amount that may be leftover from paying the concerned expenses may be credited to your account with your permission and can be used for expenses surrounding your education.

The time required to disburse the loan amount can be delayed by 1 month if you've applied for the first time or are first-year borrowers so be patient.

Some schools require a first-time applicant to attend counseling either online or in-person to be conveyed the loan terms and conditions. It is done so as to clarify any doubt regarding the application and to make the student understand the technicalities of the loan application and its contents.


Similarities between Direct Subsidized and Direct Unsubsidized Loans

There is a big difference between the two yet there are a few similarities to look out for. 

The amount borrowed

The school determines what the amount is that you can borrow under the two loans.

Length of financial aid

For both of the loans, the length of the loan period is up to 150% of the college program length you have enrolled in. Example - If you enrolled in a 4-year undergrad program, you may have the loan period for up to 6 years or up to 6 months after you have finished school.

Interest rates

The current average for interest rates is 4.45% for Direct Unsubsidized and 6% for Direct Subsidized Loans. These interest rates are applied annually and are readjusted as they change every year.

Loan Fees

These loans have an origination fee of 1.066% of the aggregate total for loans taken between 10/1/17-18 and 1.069% for loans between 10/1/16-17 and 1.062% for loans taken between 10/1/18-19.


FAQ's

  Which is better subsidized or unsubsidized loans?


If you have plans on going back to school then subsidized loans would be the best choice for you as you can save a lot of money by applying for deferment. The interest will not accrue in the case of subsidized federal loans. If you don\'t have any other choices then you can go for unsubsidized or private loans.

  Are unsubsidized loans bad?


They might have interest accrued but it should be noted that these unsubsidized loans come with a low, fixed-rate along with some valuable borrower benefits.

  What is the interest rate on unsubsidized student loans?


The 2018-2019 federal student loan interest rates are currently 5.05% for undergraduate loans, 6.60% for unsubsidized graduate loans and 7.60% for direct PLUS loans. The interest rate for an undergraduate unsubsidized student loan is the same as the interest rate for subsidized student loans.

  The difference in the grace period for subsidized and unsubsidized student loans?


Both subsidized and unsubsidized federal student loans have a grace period of 6 months. Only PLUS loans have no grace period.

  The difference in interest payments for Unsubsidized and subsidized loans?


For unsubsidized loans, the interest on the loan starts to add up from the date the loan is first disbursed. If you don\'t pay the interest it will add up and the overall cost of the loan will get higher. This is not the case for subsidized loans.