Most students need to use federal student loans or private student loans to fund their college educations. When you take out federal student loans to pay for school, the loans are either Direct Subsidized Loans or Direct Unsubsidized Loans. Direct Subsidized Loans are federal student loans available to undergrads that do not accrue interest while the student is in school or when loans are deferred after graduation.
The government sets the interest rate on Direct Subsidized Loans, there is no minimum credit score required to qualify, and rates are fixed. However, the amount students can borrow is limited. Students must complete the Free Application for Student Aid (FAFSA) to become eligible for Direct Subsidized Loans, and eligibility is based on demonstrated financial need.
Direct Unsubsidized Loans are also federal loans, and students must complete the FAFSA to be eligible. However, eligibility for Direct Unsubsidized Loans isn’t based on financial need, and students are responsible for interest on Direct Unsubsidized Loans, even while you’re in school or while your loans are in deferment after graduation. If you don’t make interest payments, the unpaid interest is added to your loan balance, making repayment more costly.
Understanding the difference between subsidized loans and unsubsidized loans is essential because it can change how your student loan interest works, the amount you pay, and how you decide to tackle student loan repayment.
Subsidized vs. unsubsidized student loans: Understanding the difference
Subsidized and unsubsidized loans are both available through the federal government for student borrowers. However, there are some important differences between them that you’ll need to understand if you are borrowing for school. Here’s what you need to know about each of these different types of student loans.
What is a Direct Subsidized Loan?
“Direct Subsidized Loans are federal loans where the federal government will pay the interest while the student is in school,” explained Fred Amrein, founder and owner of Amrein Financial. The government pays interest on a subsidized loan while you’re enrolled in school at least half-time. If you’ve already graduated and put your loans into deferment or forbearance, the government also covers interest on your subsidized loans.
While students are not required to pay interest on a Direct Loan while in school, interest begins to accrue immediately. “Either someone needs to pay that interest, or that interest is added to the original (principal) amount of the loan,” said Peter Bielagus, a financial author and speaker.
If a student takes a $10,000 Direct Subsidized Loan as a freshman, four years later, the loan balance will still be $10,000 because the government pays your interest costs. “The amount of the loan did not grow because the government made the payments for you,” according to Bielagus.
Direct Subsidized Loans are designed for lower-income, undergraduate borrowers. According to the Department of Education, your school determines the amount of Direct Subsidized Loans you’re eligible for and the amount borrowed via a subsidized loan cannot exceed financial need.
Pros of Direct Subsidized Loans
- The U.S. government pays the interest on your loan as long as you remain enrolled at half-time status.
- Interest is paid by the government on eligible loans during deferment and forbearance, as well as on certain repayment plans. Find out more about how this works with this helpful guide to federal loan interest subsidies.
- No payments are due until after the first six months of graduation.
“The biggest difference is that a subsidized loan does not get bigger, but an unsubsidized loan can,” said Bielagus.
Cons of Direct Subsidized Loans
- Graduate students don’t qualify for subsidized federal student loans.
- Students who can’t demonstrate financial need — which can happen if parents earn too much — cannot qualify for this type of financial aid.
- Annual loan limits are lower for Direct Subsidized Loans than for Direct Unsubsidized Loans. The total aggregate loan amounts are capped at $23,000 for subsidized loans.
What are Direct Unsubsidized Loans?
Direct Unsubsidized Loans do not offer additional financial assistance. Even though they’re still offered by the federal government, Uncle Sam won’t pay the interest on unsubsidized student loans.
“With an unsubsidized loan, the student is responsible for making the interest payments the moment the loan is taken out,” said Bielagus. “If the student does not make the interest payments, then those payments are simply added onto the principal amount.” As he explained, this could mean a $10,000 loan taken in freshman year might grow to $13,000 by graduation, thanks to interest accruing and being tacked onto the principal.
The government does not pay interest on Direct Unsubsidized Loans because these are general loans not based on financial need. Borrowers must repay their debt in full, interest and all.
Pros of Direct Unsubsidized Loans
- Both undergrad and grad students can apply for Direct Unsubsidized Loans.
- Potential borrowers don’t need to prove financial hardship to qualify.
- Annual loan limits are higher than for a subsidized loan, with a total aggregate loan limits cap of $31,000.
Cons of Direct Unsubsidized Loans
- Borrowers are responsible for paying all the interest on their unsubsidized loans, even during the grace period after graduation and during deferment or forbearance.
Similarities between Direct Subsidized Loans and Direct Unsubsidized Loans
Though there’s a big difference between subsidized and unsubsidized loans, both of these types of federal loan options share several similarities including:
- Amount borrowed: Your school determines the amount you’re able to borrow. After you submit your documents, the school offers you a financial aid package detailing how much you can take in subsidized and unsubsidized student loans.
- Length of financial aid: For both of these types of Federal Direct Loans, the longest eligibility period is 150 percent of the length of the college program you’re enrolled in. For instance, if you attend a full, four-year undergraduate program, you’ll qualify to receive six years worth of loans.
- Interest rates: The current APR for undergraduate subsidized and unsubsidized loans is 4.45% (between July 2017 and July 2018), according to the U.S. Department of Education. The unsubsidized graduate degree loan interest rate is 6.00%.
- Loan fees: Both loans have the same fee. For subsidized and unsubsidized federal student loans, the fee —which is charged to the aggregate total — is 1.069% for loans disbursed after Oct. 1, 2016, and before Oct. 1, 2017. The fee is 1.066% for loans disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018.
When you compare subsidized versus unsubsidized student loans, you do not need to worry about these important criteria differing from loan to loan.
Should you prioritize paying a subsidized loan or an unsubsidized loan?
When prioritizing loan repayments, it’s a good idea to repay your Direct Unsubsidized Loans first before paying back your Direct Subsidized Loans. Because an unsubsidized loan continues accruing interest while in school, the balance of your unsubsidized loans will be larger unless you paid the interest while in school.
As our student loan deferment calculator shows, a $30,000 loan at 4.45% interest would accrue $1,335 in interest over one year while your loan was in deferment. If the loan was an unsubsidized loan from senior year and you didn’t pay interest during the year, your balance would be $31,335 at graduation. You’d have to pay interest on $31,335 while your Direct Subsidized Loan would still be at $30,000 so you’d pay interest on a lower amount.
Not only could you save on interest by paying the loan with the higher balance first, but repaying your Direct Unsubsidized Loans first means that if you go back to school or otherwise qualify for deferment or forbearance, you won’t have as much unsubsidized debt for interest to accrue on.
Direct Subsidized Loans vs. Direct Unsubsidized Loans
It makes a big difference whether your interest starts accruing while you’re in school or you get a pass until you graduate. Keep this in mind when you choose your student loan repayment strategy and work toward becoming debt-free after college.
In most cases, it might make sense to choose Direct Subsidized Loans if you qualify. After all, with the government paying your interest while you’re in school, you can save quite a bit of money.
If you’re still not sure which repayment option is best for you, answer a few questions below and we’ll help you find a solution!
Need a student loan?Here are our top student loan lenders of 2020!
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
1 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 4/1/2020. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicant’s ability to supply the necessary information for submission.
5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens One is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensone.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
Citizens One Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens One reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens One Student Loans private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens One Student Loans-participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
|2.75% – 10.65%*,1||Undergraduate and Graduate|
|2.69% – 10.97%2||Undergraduate, Graduate, and Parents|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|5.20% – 14.18%5||Undergraduate and Graduate|
|2.72% – 10.98%6||Undergraduate and Graduate|