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Subsidized vs. Unsubsidized Student Loans: Your FAQs Answered

Don't let confusion over your loan options detract from the excitement of college.

Justin Cupler

Contributing Writer at Tally

July 28, 2022

Going to college is hard enough with the pressures of leaving home for the first time, taking on substantial class loads and socializing with new people. But throwing in financial aid options is enough to make your head start spinning. Something that can be especially confusing for first-time college students is weighing subsidized vs. unsubsidized student loans. 

To ease the process, we’ll run through some of the most common questions for borrowers trying to make sense of their loans or anyone wondering which loan type to apply for — including the benefits and drawbacks of each and which you should pay off first. 

What is the difference between subsidized and unsubsidized loans?

Both are federally backed loans. But for a Direct Subsidized Loan, the U.S. Department of Education pays the interest on the loan while you're enrolled in school (at least half-time), the first six months after graduation and if you pause your loan payments through deferment.

As for Direct Unsubsidized Loans, you are responsible for paying the interest on the loan from the day the loan funds are disbursed.

Who is eligible for a subsidized loan? 

The Direct Subsidized Loans program is for undergraduate students with a school-determined financial need. You will need to fill out a Free Application for Federal Student Aid (FAFSA) to be considered.

Is the FAFSA form for subsidized or unsubsidized loans?

After you fill out your FAFSA form, your college will determine your financial need, which is based on your and your parents' income and assets. Your financial need determines the federal student loans available to you, which may be subsidized or unsubsidized.

What can you use subsidized loans for?

Both subsidized and unsubsidized student loans can only be used for the cost of attendance, such as tuition, supplies and travel expenses during the academic year. For anything else, you may have to turn to private student loans.

What is the maximum amount of time you can have subsidized loans?

The Department of Education restricts subsidized loans to 150% of your program's published time frame. For example, if you are in a four-year bachelor's degree program, you only qualify for direct subsidized loans for six years.

How much does a subsidized student loan cost?

There are fees for both subsidized and unsubsidized loans, which are charged as a percentage of your total loan amount.

Federal Direct Subsidized Loans and Direct Unsubsidized Loans disbursed between Oct. 1, 2020, and Oct. 1, 2023, carry a 1.057% loan fee. For example, if you took out a $5,000 federal student loan for the school year, the federal government would take $52.85 from the disbursement. You are still responsible for repaying the total amount of the loan, however, not just the amount you received. 

What are the maximum loan limits for subsidized vs. unsubsidized student loans?

You have an aggregate loan limit across both loans and annual loan limits for each year. As a dependent (parents claim you on their taxes) student, your total limit is $31,000, with a maximum of $23,000 in subsidized loans. 

When it comes to annual loan limits for dependent students:

  • First-year students can borrow up to $5,500 (of which $3,500 can be subsidized).

  • Second-year students can borrow up to $6,500 (of which $4,500 can be subsidized). 

  • Third-year students and beyond can borrow up to $7,500 (of which $5,500 can be subsidized).

Independent undergraduate students can borrow $57,500, with a maximum of $23,000 in subsidized loans. They have the same subsidized loan limits as dependent students, but the total annual loan limits increase to $9,500 in the first year, $10,500 in the second year and $12,500 in the third year and beyond. 

Graduate students have a limit of $138,500 (including undergraduate loans), and $65,500 can come from Direct Subsidized Loans.

What are the interest rates for subsidized vs. unsubsidized student loans?

Interest rates for these loans depend on the type of borrower you are, rather than the kind of loan you have. Financial aid in the form of federal subsidized and unsubsidized student loans disbursed between July 1, 2022, and July 1, 2023 has a 4.99% rate for undergraduate students and a 6.54% rate for graduate and professional students. Your credit score doesn’t have an impact.

How long do I have to pay my subsidized loan?

Borrowers usually have between 10 and 25 years to pay off a subsidized loan, and the same applies to unsubsidized loans. The exact period of time depends on the repayment plan you choose.

Do you pay back unsubsidized loans?

Yes, you have to pay back an unsubsidized loan. But you aren’t required to start making monthly loan payments until after a six-month grace period after you graduate. 

However, keep in mind that interest starts accruing when your loan is disbursed. For this reason, some choose to make interest payments while they’re still in school. 

If you choose not to pay the interest of an unsubsidized loan while you’re in school or during your grace period, your lender will apply it to your loan balance after you leave school. For example, if you have $2,000 in unpaid interest after graduating school, your lender will add that to your loan amount. This means you will start paying interest on that interest. 

What are the repayment plans for subsidized vs. unsubsidized student loans?

The federal government offers the same repayment options for both Direct Loan programs:

  • Standard Repayment Plan: Fixed monthly payments over a 10-year repayment term.

  • Graduated Repayment Plan: Lower monthly payments gradually increase every two years over a 10-year term.

  • Extended Repayment Plan: A 25-year repayment term, over which you can make fixed or graduated payments.

  • Revised Pay As You Earn Plan (REPAYE): Payments are 10% of discretionary income, and the loan is forgiven after 20 or 25 years.

  • Pay As You Earn Plan (PAYE): Payments are 10% of discretionary income but never exceed the Standard Repayment Plan's payment, and the loan is forgiven after 20 years.

  • Income-Based Repayment Plan (IBR): Payments are 10-15% of discretionary income, and debt is forgiven after 20 or 25 years.

  • Income-Contingent Repayment Plan (ICR): Payments are 20% of discretionary income or a fixed plan (whichever is lower). The loan is forgiven in 25 years.

  • Income-Sensitive Repayment Plan: Payments are based on annual income, and the loan is forgiven in 15 years.

Should you pay off subsidized or unsubsidized loans first?

Because they share the same interest rate and have the same fees, it may seem like it doesn't matter whether you pay off your direct subsidized loans or your unsubsidized loans first. However, if you look closely at your loan terms, you'll find savings by prioritizing payments.

Because student loan interest rates vary by year, organizing your loans by interest rate from highest to lowest will give you an idea of which to prioritize. From there, paying the loan with the highest interest rate first will typically give you the most savings over time. If two loans have the same interest rate, pay the one with the highest balance first. You might recognize this as the debt avalanche method. 

Alternatively, you can skip the whole calculation and simplify the process by applying for a Direct Consolidation Loan. Subsidized and unsubsidized student loans qualify for this consolidation, which rolls all your federal student loans into one loan with a fixed interest rate.

If a student loan consolidation is right for you, you can choose from any of the repayment plans mentioned above, even the debt-forgiveness programs. 

Can subsidized loans be forgiven?

Yes, the government offers the same student loan forgiveness programs for Federal Direct Subsidized and Federal Direct Unsubsidized student loans, including initiatives for teachers. Not all student loan repayment plans qualify for forgiveness programs. It's important to check with your loan servicer for details on your particular loan and repayment plan. 


Which is better: subsidized or unsubsidized loans?

Subsidized loans are more beneficial, but unsubsidized loans are available to more applicants and have fewer restrictions. 

Having a Direct Subsidized Loan means your interest charges are paid by the Department of Education while you’re still in school at least half time and during a six-month grace period following graduation (or if you drop to below half-time enrollment).

However, to access one of these loans, you must demonstrate a financial need. Plus, graduate and professional students are only eligible for Direct Unsubsidized Loans.

Although unsubsidized loans involve accruing interest while you're in school, they’re available to virtually all college students, including graduate students and professional students. They also don't limit the amount you can borrow by your household income. 

Hit the books

The key difference between federal Direct Subsidized vs. Direct Unsubsidized student loans is how interest is handled. Since subsidized loans offer waived interest charges while you’re attending school (and for the first six months after you graduate), you’ll want to use these first, but you may end up mixing in unsubsidized loans to fill the gaps. 

When it comes time to pay off those loans, if you'd rather not calculate which loan to prioritize, you may choose to roll them all into a Federal Direct Consolidation Loan and have just one loan servicer and monthly payment.  

With the muddy waters of student loans cleared up, it's time to hit the books.

If you have other types of debt you’d like to get in order, such as credit card debt, consider the Tally† credit card repayment app. It combines your higher-interest credit card debt into a lower-interest line of credit, all while helping you to automate payments and manage your finances more easily and efficiently.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.