Subsidized vs. Unsubsidized Student LoansDecember 28, 2020
Last Updated on August 10, 2023
When you begin college and encounter the financial aspects of paying for school, you’ll likely come across different jargon related to student loans. It’s essential to understand the different types of student loans to know what you will be responsible for paying back. Here we will discuss the differences in subsidized vs unsubsidized student loans.
When you complete the FAFSA, it makes you eligible to receive federal direct student loans. Direct Loans can be subsidized or unsubsidized. Subsidized loans are available to undergraduate students with financial need. The borrower does not pay interest on Direct Loans during school and specific periods. Unsubsidized loans are available to all students, and interest begins accruing after disbursement.
Subsidized vs Unsubsidized Loans
The type of loan you can receive depends on the education you are pursuing. If you attend a four-year college or university, community college or trade school, you can receive either federal direct loan type. However, subsidized loans are available only to undergraduate students who can demonstrate financial need. Unsubsidized loans are available for both undergraduate and graduate school, and demonstrated financial need is not required.
Subsidized loans are based on financial need, which means they may not be available to everyone. You can calculate financial need by subtracting your Expected Family Contribution (EFC) from the school’s Cost of Attendance (COA).
In some cases, you may be able to take out subsidized student loans, but only in limited quantities. Your FAFSA information determines your EFC, and if your expected family contribution is high, your subsidized loan amount will likely be capped.
The most significant difference between subsidized vs unsubsidized loans is interest savings. Although the interest rate is the same on both undergraduate subsidized and unsubsidized loans, the primary difference is who pays the interest.
The U.S. Department of Education pays interest on your subsidized Direct Loans while you are a student, when your loans are in deferment and during your grace period. With unsubsidized loans, the borrower becomes responsible for the interest as soon as the loan is disbursed.
Although the unsubsidized loan payments are not due while in school, interest will continue to accrue during that time. Therefore, upon graduation, an unsubsidized loan will be larger than what was initially borrowed.
Because the U.S. Department of Education pays interest at certain times for subsidized loans, it is more advantageous to take the maximum of subsidized loans you are eligible for before borrowing unsubsidized loans.
Limit on Amount to Borrow
The school’s Cost of Attendance limits the amount you can borrow for subsidized and unsubsidized loans. There are also federal limits on how much you can borrow. Overall, the total amount of subsidized loans dependent and independent students can borrow is $23,000. The total amount of unsubsidized loans that independent undergraduate students can borrow is $34,500.
Refinance to Save
When you begin paying your loans back, you may realize that a large amount of your budget is going to your student loan payment. To save money you can refinance your student loans. Both unsubsidized and subsidized loans can be refinanced.
Refinancing means obtaining a new private student loan to pay off previous student loans. The new loan has different terms, including a different interest rate, payment and term. Refinancing also allows you to consolidate multiple loans into one new loan, making managing your loans much easier.
Refinancing can be an effective cost-saving option in many different scenarios. If you have unsubsidized loans, you will be responsible for paying the interest as soon as you borrow them. Even if you are still in school or in the grace period after graduation, interest will continue to accrue. If you can begin making payments right after graduation without utilizing the grace period, then refinancing could help you save on interest costs.
For any subsidized loans it may be more beneficial to wait until you are responsible for the interest costs, then refinance. To see how much you can save by refinancing, use our Student Loan Refinance Calculator.*
The most notable difference between subsidized and unsubsidized student loans is who pays the interest. Due to the interest being paid on subsidized loans by the U.S. Department of Education in some periods, it makes wise financial sense to borrow the maximum amount you are eligible for. Refinancing is a beneficial option to save money in most cases, whether you have subsidized or unsubsidized loans.