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 7th June 2019


Direct Subsidized vs Unsubsidized loans

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


Federal subsidized and 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. 

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

Factors Direct Subsidized Loans Direct Unsubsidized Loans
Loan period Up to 150% of school term Up to 150% of school term
Interest rates 5.05% 5.05% for undergraduates 6.6% for the rest
Applicable to Undergrads only Undergrads, Grads, and Professionals
Necessity of financial need Yes No
Repayments 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.

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.


Eligibility and Requirements for Direct Unsubsidized 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.


How to apply

1 - The first step is to apply for Financial aid by completing the FAFSA application at  FAFSA.ed.gov. [Learn about What is FAFSA here ] 

2 - Once the FAFSA application is submitted you shall receive your Financial aid award letter by mail which will contain the following -

3 - Eligibility for financial aid for the loan, the interest rates, charges which will be applied, and the timeline for the loan.

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

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


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.


Where do the 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 left over 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.


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.

 

[Learn about Student loan consolidation here

 

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.

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

Eligible Repayment plans 

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)

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.


How to apply for a Direct Subsidized student loan

The process of applying or borrowing a Direct Subsidized loan is as explained below.

This loan is provided only to those undergraduate students who are in financial need.

Steps to apply for a Direct Subsidized Federal student loan  

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.

 

[Also Read: What are FAFSA deadlines?

 

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 time. Payment will not be started until you leave the 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 - Some times 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.


Direct Subsidized student loan limits

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.


Direct Subsidized 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 the Unsubsidized loans are having interest rates of about 6.6%.

 

[Read more: What are interest rates?

 

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


The Direct Subsidized 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 time of the period of the course or program.


The Direct Subsidized student loan repayment plan

The repayment for the subsidized loans does not start until 6 months after you graduate or stop attending or at least a half time basis. Since the federal government is responsible for paying for the interest that is accumulated on your loan for the time period that you are in school, your loan does not accumulate any interest nor are you held responsible for the repayment of the same until your repayment begins. There are many repayment plans that are available

You will be given the choice of selecting your repayment plan. If you do not choose a plan, you will be placed in the standard repayment plan and will be asked to make fixed monthly payments of at least $50 over 1 year. Remember to borrow only what you require.

 

[Learn about Income-driven repayment plans for student loan

 

Always make sure you use all Federal student loan options before looking into private loan options and also make sure you do your research on the loans you plan on getting to make sure you are getting the best deal for yourself.


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? Direct Subsidized Loan or Direct Unsubsidized Loan?


If it was just the two, the choice would definitely have to be the Direct Subsidized loan as it allows you to go through college without having to pay for any of the interest.

Also having the government cover your part of the interest for the same time period leaving you with the option to start paying the loan amount at the end of graduation or up to a grace period of 6 months after graduation and have no interest piled up on the principal amount.

  How much Unsubsidized loan can I get?


This depends on two factors primarily.

  • One is the cost of school attendance which is technically the upper limit to the amount which you are allowed to borrow.

  • Two is the amount that is left after subtracting whatever financial aid you have received so far which leaves you with the amount for which you can apply for a Federal Unsubsidized loan.

  How much interest accumulates on an Unsubsidized loan?


The interest rates on the loans are of two parts origination charges and interest on the principal amount borrowed.

The origination charges for both the Subsidized and the Unsubsidized loans are the same and stand at 1.062% for the year 2018-19.

The interest rates although differ from being 4.45% on the Unsubsidized loan to 6% on the Subsidized loans.

  Do you pay interest on Direct Unsubsidized loans while in school?


Yes, the interest accumulates during the period of school but the choice to pay it can be made.

Paying it would lead to a lesser burden to pay at the end of graduation but if left to accumulate, it can build up by the time you graduate.

  Which student loans are the best - Subsidized or Unsubsidized?


For a student with a financially strong background, one can opt for the Unsubsidized Loan as this allows the payments to begin while attending the school which also helps stabilize the requirement for money for various uses but still being able to maintain a monthly payment for the loan.

  What is the maximum amount of Direct Unsubsidized loan you can get?


The maximum amount of student loans is defined by the school as it is supposed to be lesser than the cost of school attendance which is usually defined and finalized by the school authorities, also this amount is deducted off the financial aid already being received by the student and whatever remains can be the amount you can avail as a loan.

This amount usually lands in the neighborhood of $5,000-$6,000 for graduates and about $10,000-$15,000 for undergraduates.

  Can I use my Direct Unsubsidized loan to pay for rent?


Yes. Since student loans are meant to cover any and all expenses a student faces during the period of the program. If one has enough money left over from the loan after paying all academic fees etc. the student can pay for the rent of stay. Provided that the stay is in an on-campus stay. some off-campus students may use this also to cover a part of the rent.

  Are Direct Unsubsidized loans worth it?


Yes, if used well in time and paid back regularly. They are a good choice if the course or program leads to a career of good income and education down the road. This ensures that those with the skill to progress well can do so with the help of these loans and not be burdened and be unable to attend school due to the lack of financial support.

  Can I use my Direct Unsubsidized loan to invest?


Yes, it can be done albeit it is risky considering if lost the debt becomes deeper. But tread at your own risk, as the purpose of student loans is to cover expenses pertaining to education and so on.

  How can I use my Direct Unsubsidized loan?


  • Tuition and Fees - Generally, your largest education-related expense, tuition, and fees cover the basics as of enrollment at your school.

  • Housing costs

  • Transportation

  • Food

  • Textbooks and Supplies

  • Spring Break

  • Eating out

  • Dorm room accessories

  Is it better to pay off Subsidized or Unsubsidized?


Usually, Unsubsidized loans mean that the interest starts to accumulate from the beginning and it will probably be capitalized if you do not start making repayments immediately after.

But if the interest rates are low, you shouldn't be facing much-capitalized amounts by the time you begin making repayments. Hence, pay off the low-interest loans after high-interest rate subsidized loans.

  How can I avoid paying back student loans?


Here are a couple of ways you can stop paying your student loans (legally) -

  • Enroll in an income-driven repayment

  • Ask your employer

  • Pursue a career in public service

  • Serve your country

  • Play a game

  • File for bankruptcy

  • Apply for a disability discharge

  • Investigate loan repayment assistance programs (LRAPs)

  Can parents pay off student loans?


At the least 1 out of 3 parents will help their kids pay back their student loans. Another one-third of parents mention that they will help their child pay off part of all of their student loans. According to a recent study, the total student loan has drastically increased and reached a peak of about $1.5 trillion dollars in the U.S.

  Should I pay off my student loans in full?


Many a time people neglect their student loan debt and just walk around with them even when they have no other debt to deal with. This might be hurting you. You may also be wondering if you should be including your student loan debt in your debt repayment plan or if you should consider paying them off early.

  How do I get more Subsidized loans?


Recommendations

  • File the FAFSA every year to maintain eligibility for student aid.

  • Apply for grants and scholarships that are applicable to you.

  • Borrow Direct Subsidized Loans (if eligible) first. Then, consider taking out Unsubsidized loans.

  • Compare the costs and benefits of Parent PLUS Loans and Private student loans and proceed accordingly.

  What can you use Subsidized loans for?


A couple of things that subsidized loan money can be used to pay for are -

  • Tuition and Fees. Usually, this is your largest expense related to education, tuition and fees cover up most of your basic costs of enrollment at your school.

  • Housing expenses

  • Transportation

  • Meals

  • Textbooks

  How much can I borrow in Subsidized loans?


An undergrad student can borrow a maximum amount of $5,500 to $12,500 per year in Direct Subsidized Loans and Direct Unsubsidized Loans respectively. It also depends on what year of school you are in right now and your dependency status.

  Can you pay a Subsidized loan while in school?


Direct Subsidized Loans and Perkins loans do not accumulate any interest for the period while you are attending school, while you are enrolled or while you are there for at least half time and during the grace period.

If you can pay off the balance before the end of the grace period then you will essentially be paying just the amount of money that you borrowed excluding any loan fees.

  Do you have to pay back Subsidized loans?


Yes, you most certainly are required to pay back the subsidized student loan. But the government will take care of the interest for the time period from when you receive the loan till 6 months after you graduate from college. But, you are still obligated as a borrower to repay the amount which you have borrowed.

  What does it mean for a loan to be Subsidized?


A loan that is mentioned as Subsidized means that you as the borrower are not required to pay interest on the debt for the time period while you stay in school until graduation or 6 months after graduation.

Subsidized loans are less expensive than other loans that are available but the clause is that you must be able to demonstrate financial need to get it approved in your name.