Federal Subsidized Vs Unsubsidized Loans – What’s The Difference?
Subsidized and unsubsidized loans are two terms that are used a lot when people talk about getting funds for education. We know what these words mean in the basic sense, yet what exactly do they denote when we talk about actual student loans? And how do subsidized loans differ from unsubsidized loans?
As a brief explanation, subsidized and unsubsidized loans are both offered by the U.S. Department of Education. The main difference between the two is that subsidized loans have stricter qualification requirements but have better loan terms.
Direct Subsidized Loans
Direct subsidized loans are available to undergraduate students who can provide proof of their financial needs. Subsidized loans do not require credit checks and students only need to submit a FAFSA or Free Application for Federal Student Aid form.
The school or college will determine how much the student can borrow through a subsidized loan. The minimum loan amount is $3,500 while the maximum amount is $5,500 annually.
Subsidized loans had a 3.73% interest rate in the year 2021-2022. The US Department of Education will pay the loan interest while the student is in school for at least half-time, during deferment periods, and for the first six months after leaving school. Other times, the borrower will be responsible to pay the interest.
Direct Unsubsidized Loans
Undergraduate, graduate, and professional degree students can apply for direct unsubsidized loans. These loans do not require the borrower to have financial needs. Unsubsidized loans also do not require credit checks and the requirement is to submit a FAFSA form. Students who qualified for a subsidized loan can also apply for an unsubsidized one.
The school or college will determine how much the student can borrow based on the cost of attendance and any other financial aid the student qualified for. The federal government set the upper limit to $20,500 while the minimum amount is $5,500. Any subsidized loan will be deducted from the borrower’s eligible loan amount.
For undergraduate students, the interest rate is 3.73% and for graduate or professional degree students 5.28%. The borrower will be responsible for paying the interest on the loan for its entire duration. Choosing not to pay interest while in school, during deferment or forbearance, or during grace periods will allow the interest to accrue and be added to the principal loan amount.
Subsidized Vs Unsubsidized Loans – How the Numbers Differ?
As we mentioned earlier, the school will determine the type of loan and the loan amount that a student is eligible for every academic year. However, there are also upper limits on the loan amount that a student can borrow every year, which the federal government sets.
The limits will differ based on the year level and whether the student is dependent or independent. An independent student is defined by the Department of Education as one of the following: a graduate or professional degree student, at least 24 years old, married, a member of the armed forces, a veteran, a ward of the court, an orphan, an emancipated minor, a student with legal dependents aside from a spouse, someone homeless, or someone at risk of becoming homeless. A student who is not any of the above is categorized as a dependent student.
The chart below shows the total and annual limits that students can borrow through subsidized and unsubsidized loans.
| Year | Independent Students | Dependent Students |
| Undergraduate – 1st Year | $9,500
Max $3,500 in subsidized loans | $5,500
Max $3,500 in subsidized loans |
| Undergraduate – 2nd Year | $10,500
Max $4,500 in subsidized loans | $6,500
Max $4,500 in subsidized loans |
| Undergraduate – 3rd Year + | $12,500
Max $5,500 in subsidized loans | $7,500
Max $5,500 in subsidized loans |
| Undergraduate – Aggregate | $57,500
Max $23,000 in subsidized loans | $31,500
Max $23,000 in subsidized loans |
| Graduate/Professional | $20,500 – unsubsidized | NA |
| Graduate – Aggregate | $138,500
Max $65,500 in subsidized loans | NA |
Where do private loans come in?
Well, the biggest difference between private and federal loans is who provides them – private lenders vs the federal government. Federal loans also typically have lower interest rates compared to private loans and can even be subsidized up to a certain limit. Private loans meanwhile are never subsidized and tend to have higher rates. The advantage of a private loan and why students still apply for them is that they can cover 100% of the total expense in college minus any federal aid. It makes sense for those who require help covering the full cost of the tuition, fees, and other expenses.
Final Thoughts
Different types of loans can complement one another. Qualifying for a subsidized loan doesn’t mean you can’t apply for a different unsubsidized loan. Undergraduate students who can show that they need financial help can apply for a subsidized, unsubsidized, private loan, or all three of them. Financially capable students can still apply for an unsubsidized federal loan and a private loan.
The amount that a student can borrow through these types of loans depends on their financial capacity and the cost of attending college or university.
