Unsubsidized loans: how do they compare to subsidized loans?

The difference between unsubsidized and subsidized loans is who pays the interest.



Elissa Suh

Elissa Suh

Senior Editor & Disability Insurance Expert

Elissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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Key Takeaways

  • Direct unsubsidized and subsidized loans are both loans from the federal government

  • Borrowers of an unsubsidized loan are responsible for paying interest in addition to the principal

  • Not paying accrued interest means you’ll have larger payments when it’s time to repay the loan

  • Unsubsidized loans have more lenient eligibility requirements; you might be eligible even if you don’t meet the financial aid requirements for a subsidized loan

An unsubsidized loan is a type of federal student loan where the borrower is responsible for paying the interest.

Higher education is expensive and many students cannot afford to pay for it all on their own. Federal student loans tend to have better terms than private loans, including lower interest rates. Two common types of federal student loans are the direct subsidized loan and direct unsubsidized loan. While the direct subsidized loans are only available for those with a financial need, everyone is eligible for an unsubsidized loan, regardless of financial need.

These federal loans share many similarities — like interest rates, loan fees, and repayment plan options — there is one main difference: the borrower is responsible for paying the interest accumulated on an unsubsidized loan. So with a subsidized student loan, the government helps reduce the cost of attendance by paying the interest during certain periods over the life of the loan.

Unpaid interest accumulates over time and if you put it off too long, you may repay more than what you initially borrowed. But that doesn't necessarily mean unsubsidized loans aren’t helpful. You can always pay the interest before the repayment plan officially begins.

How an unsubsidized loan works

The first step in applying for financial aid is filing a FAFSA form, which details your financial circumstances, including income and tax information. It is required by most colleges and universities if you are seeking financial aid.

There are no financial eligibility requirements for an unsubsidized loan, but you’ll still need to fill out the form and meet other qualifications. Borrowers must be a U.S. citizen or permanent resident, enrolled in an accredited school at least half time, and pursuing a degree or certificate from the school. Additionally you must not be in default on other federal student loans or owe money for a federal grant.

When you borrow money for a federal student loan, the lender is the U.S. Department of Education. Billing and processing however will be outsourced to a third-party loan servicer. As soon as the federal loan funds are disbursed to the college, they begin to accumulate interest. If you don’t pay the interest, it will capitalize— meaning it gets added to the principal loan amount, potentially causing you to repay much more — sometimes thousands of dollars more — over the course of your loan.

The government actually pays this interest for a subsidized loan (more on this below) while you’re in school, but if you have an unsubsidized loan then you’ll have to pay it. While you aren’t required to start making payments until six months after graduation (the grace period), you can. Paying the accrued interest while you’re still in school or during the grace period can help you get a head start on your repayment plan and will prevent having a bigger bill down the road since the unpaid interest isn’t added to your loan balance.

Missed payments

If you are experiencing financial hardship and unable to make your payments, you can get forbearance, which allows you to postpone or reduce payments for a period of time. It may be harder to get forberanace with a private loan.

Unsubsidized vs subsidized loans

If you have a subsidized loan, then the government will pay the loan interest under certain conditions, such as when the student is enrolled in school at least half time, during the grace period, and during deferment. Also, direct subsidized loans are based on need; if you don’t meet the financial eligibility requirements you will not be able to borrow this type of loan. Additionally, you must be enrolled in an undergraduate program to qualify for a subsidized loan; graduate and professional students cannot apply.

Other than who pays the interest and the qualifications, unsubsidized and subsidized loans have similar features.

FeatureUnsubsidized loanSubsidized loan
Loan limitHigherLower
Interest rateSame fixed-rateSame fixed-rate
Who pays interestBorrower alwaysGovernment sometimes
Loan feeSameSame
QualificationsNoneUndergraduate only; based on financial need

Next we’ll discuss the features of an unsubsidized loan, and how they compare to the subsidized loan.

Features of federal direct loans

The terms and figures for federal direct loans, unsubsidized and subsidized, are decided by the government and subject to change. You can always check the Department of Education’s Student Aid website or your school’s financial aid office for more details.

Loan amounts

How much you can borrow is ultimately determined by the school. You will never get a federal direct loan greater than the cost of attendance. There are annual loan limits and aggregate loan limits for all federal loans that vary based on what year of school the student is in and whether or not they are independent or dependent.

Generally the loan limits are higher for unsubsidized loans. For example, the unsubsidized loan limit is $5,500 for a dependent student’s first year at an undergraduate college program. The subsidized loan cap is $3,500.

Loan rates

Unsubsidized and subsidized federal student loans have the same fixed interest rates, which are listed as an annual percentage rate (APR). The interest rates for undergraduate loans disbursed from 7/1/2021 to 7/1/2022 are 3.73%. Unsubsidized loan rates for graduate school students for this same time frame are 5.28%.

Disbursement dateUndergraduate loanGraduate loan
7/1/2020 to 7/1/20213.73%5.28%
7/1/2020 to 7/1/20212.75%4.30%
7/2019 to 7/1/20204.53%6.80%

Learn more about how APR works.

Loan fees

The origination fee for all federal direct loans is:

  • 1.057% for loans disbursed on or after October 1, 2020, and before October 1, 2022

  • 1.059% for loans disbursed on or after October 1, 2019, and before October 1, 2020

Is an unsubsidized or subsidized loan better?

Subsidized loans have obvious benefits over unsubsidized loans, since the government pays the interest during certain periods of time. But that doesn’t mean unsubsidized loans aren’t worthwhile; they help many students pay for college. Furthermore, many students won’t always have a choice between the two loan types, since direct subsidized loans are only offered to students who demonstrate financial need.

Unsubsidized loans provide a helpful alternative for families who may make too much money but still need help paying for the cost of tuition. If you have an unsubsidized loan, you might consider making a payment on the accrued interest while you’re in school. It will help free up more discretionary income down the road in the years after graduation.