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Subsidized vs Unsubsidized Loans: Here Are The Big Differences

Subsidized loans mean Uncle Sam helps you out with interest while you're in school or deferment. With unsubsidized loans, Uncle Sam's no help and interest starts accruing the minute you get your loan money---and it's all on you to pay it back.

In the world of student loans, two words show up a lot: subsidized and unsubsidized. It’s good to know the difference. The type of loan affects your interest rate, your repayment planning, and how much you’ll pay in the long run.

What are subsidized loans?

To subsidize means, simply, to help someone pay the cost of something. Subsidized housing, for instance, is housing where a federal or private organization pays a portion of the cost—making it affordable to low-income residents. Subsidized loans are similar.

Just as the US government has an interest in low-income people having places to live, they also have an interest in people—of all income levels—going to college.

In subsidized housing, the government pays part of your rent. It’s not quite the same with subsidized loans. Rather than pay a portion of your tuition, the government instead pays the interest on your loan while you’re in school and for the six months after you leave school (whether you graduate or not). It also steps in if you go into deferment.

So while the government doesn’t make the amount of your loan any smaller, they do keep it from getting bigger and bigger while you’re in school (and not making much money) or when you’ve just graduated and are looking for your first job. They also step in if, for some reason, you can’t pay your loans for a short time and enter deferment.

Subsidized loans are need-based, and need is determined by your financial situation and the financial situation of your parents. If you take out a federal Direct Subsidized Loan, the amount you can borrow will be limited to how much you need.

On any federal subsidized loan, the government pays your interest:

  • When you’re enrolled in school at least half-time
  • During the six-month grace period after your enrollment in school (i.e after you graduate or leave for another reason)
  • During any periods of deferment

Basically, whenever the loan can accrue interest while left unpaid, the government will help you.

There are two different types of federal subsidized loans: Direct Subsidized Loans, or Subsidized Stafford Loans, and Perkins Loans.

Direct Subsidized Loans are only available to undergraduate students, and they are one of the most common loans.

Perkins Loans are available to both undergraduate and graduate students, but only certain schools offer them, and borrowers should demonstrate exceptional financial need.

What are unsubsidized loans?

Unsubsidized loans are any loans where the borrower is responsible for the interest at all times—whether the borrower’s in school, in deferment, or in a repayment plan.

With unsubsidized loans, you start accruing interest from the second you take them out, like all other loans, including mortgages and car loans. As you can imagine, that means you pay more over the term of your loan—a lot more.

Unsubsidized loans cost you a lot more: An example

Let’s say you take out a $10,000 unsubsidized loan at the current rate of 3.76 percent for undergraduates your freshman year of college. How much interest will accrue each year?

$10,000 * .0376 = $376 per year

Interest on student loans accrue at different rates, but most compound daily. That means you are charged a little bit of interest every day. How much? Well, let’s do the math:

$376 per year / 365 days in a year = ~$1.03/per day

Students typically (but not always) take four years to get their degree. Presuming you are the typical student, then this loan will rack up $376 each year you’re in school. At the end of four years, you’ll have accrued a total of $1504 in interest.

Borrowers typically have six months (or about 180 days) between the time they leave school and the time they have to start repaying their loan. Interest on unsubsidized loans continues to occur during this time. (You get a break from payment during the grace period, not interest.)

180 days * 1.03 = $185.40

That brings the total interest accrued (on just this one loan) to $1689.40.

At the end of your grace period, if you haven’t made any interest payments, then something terrible happens: Capitalization.

What’s capitalization? Capitalization is when the interest you owe gets added to your principal balance, and that interest starts accruing interest on its own.

I know, right? So, while you took out $10,000 in interest, at the end of your grace period (presuming you made no payments while you were in school), you now owe the bank or Sallie Mae $11,689.40.  And you’re going to be charged 3.76 percent on that balance from now on.

Presuming a 10-year repayment plan, that means you’ll end up paying another $2,353 in interest over the life of the loan, in addition to the almost $1,700 that accrued while you were in school, bring your total interest to a little over $4,0

On a subsidized loan with a similar interest rate, your total interest would be just over $2,000.

Because unsubsidized loans are not subsidized by the government, they don’t have as many restriction and financial aid qualifications.

What loans are unsubsidized: Graduate PLUS loans, Direct Unsubsidized Loans (also called Unsubsidized Stafford Loans), and Parent PLUS loans. Loans for graduate education will be unsubsidized (unless you qualify for a Perkins loan).

Are subsidized loans a better deal?

If you meet the requirements? Most definitely. But you’ll have to provide proof of financial need and be eligible for federal student aid.

Subsidized loans also have limits on how much you can borrow each year. The cumulative loan limit is $23,000. Depending on your financial aid package and the cost of your program, you may have to take out a combination of subsidized and unsubsidized loans.

Can private loans be subsidized?

The bank or lender, not the government, sets the terms of your private loan—including the interest rates. These loans will probably be unsubsidized. Private loans usually feature variable interest rates, which rise and fall with the market. If you’re a private loan holder, you’ll be paying interest.

Can you lose eligibility for subsidized loans?

You can only receive subsidized loans for 150 percent of the length of your academic program. This length is determined by the school. For instance, if your school says your bachelor’s degree program lasts four years, you’ll only get subsidized loans for six years. Any federal loans you take out after that will be unsubsidized. If you plan on extending a degree program to accommodate other obligations, look into any time limits on subsidized loans.

You’ll be eligible for subsidized loans again if you start a new undergraduate degree program, but it needs to be at least as long as your previous program.

What happens if you consolidate different types of federal loans?

When you consolidate loans, the interest rate on the new loan is based on the average rate of all the loans you consolidate. That means if you consolidate subsidized and unsubsidized loans together, your interest rate will rise. Combining low-interest loans with high-interest ones usually means you end up paying more over time.

To keep interest rates low and keep the benefits of the subsidized loan, consider consolidating subsidized and unsubsidized loans separately.


Student loans can be overwhelming and confusing. But knowing the nitty-gritty details of each of your loans—and what you can expect to pay and when—can keep you from making a costly mistake or getting in over your head.

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