Subsidized vs Unsubsidized Loan

For many students who want to pay for college, federal student loans are a good option. Federal student loans fall into two categories: subsidized and unsubsidized.

Increasing college costs have driven more students to take out loans to cover their expenses. Even though some students choose loans from private lenders, as of March 2021, approximately 42,9 million students were in possession of Federal Direct Loans.

Data shows that federal loans were only taken out by 30% of undergraduate students in 2016-17. During the same period, 5% of undergraduate students took out unsubsidized loans only, 5% borrowed subsidized loans only, and 20% borrowed from both loan programs. Sixty-eight percent (68%) of college graduates who graduated from public and non-profit colleges owed student loans.

Choosing between subsidized and unsubsidized federal student loans can drastically affect how much you owe after you graduate.

To ensure you get the most out of both loans, we have provided you with an overview!

What Is A Subsidized Loan: Pros and Cons

Undergraduate students who demonstrate a financial need are eligible to receive Direct Subsidized Loans. The interest on these loans is not accrued while they are awaiting payment. This makes them more affordable than Unsubsidized Direct Loans.

While the borrower is enrolled at least half-time in school, during the grace period after graduation, and during the deferment period, the U.S. Department of Education pays interest on subsidized loans.

Students in need of financial assistance receive slightly better terms through Direct Subsidized Loans.

Pros of subsidized federal student loans

• Students will receive interest payments on their student loans while they remain enrolled, during the six-month grace period and the deferment period.
• Credit checks are not required for the borrower.
• It is not necessary to have a cosigner.
• Unlike private student loans, the interest rates on these loans are fixed.
• The borrower can postpone loans that have difficulty being repaid.
• You may be able to repay the loan based on your income.
• Under certain circumstances, the loan might be forgiven in whole or in part.

Cons of subsidized federal student loans

• If a student’s parent’s income and assets are high, a subsidized loan may not be available.
• Students at the graduate and professional levels cannot apply.
• Students may have to supplement their loans with other loans because borrowing limits are lower.
• The balances on unpaid loans do not disappear during bankruptcy.

What Is A Unsubsidized Loan: Pros and Cons

Direct Unsubsidized Loans are student loans from the federal government that accrue interest upon disbursal to schools. During your school year and your grace period, you may opt not to pay interest. Any unpaid interest, however, will be added to your total balance.

Pros of unsubsidized student loans

• Students at all levels are eligible, including undergraduates, graduates, and professionals.
• A subsidized loan has a lower loan limit than an unsubsidized loan.
• Anyone can apply for a loan, regardless of their financial situation.
• If the student graduates or leaves school within six months after graduation, payments can be deferred (but interest will accrue).
• Repayment options are available to students.
• It is not necessary to check your credit history.

Cons of unsubsidized student loans

• Even while you are in school, unsubsidized loans accrue interest.
• If the borrower fails to pay the interest when it accrues, it will be capitalized (added to the principal loan balance).
• Bankruptcy cannot discharge loan balances.

You cannot tell which loan is bad or good because of their differences; what’s important is determining what’s best for you based on your needs and circumstances. 

In order to determine this, we will take a closer look at the details!

How Much Can You Borrow

Your school determines which loan type(s) you qualify for during each academic year and the amount you can receive. 

You are required to meet subsidized and unsubsidized loan limits each academic year (annual loan limits) as well as a total loan limit for undergraduate and graduate study (aggregate loan limits). Generally, you may not be eligible to receive as much as the annual loan limit each year. Based on these factors, there are different limits

• The year in which you are enrolled in school
• The status of your dependency as a student.

Undergraduate Students

First-year undergraduates who are still financially dependent on their parents can borrow a combined total of $5,500 in subsidized and unsubsidized loans. However, a student can receive subsidized loans for only $3,500 of this amount. 

Undergraduates who are independent students or who do not have parents qualifying for Direct PLUS loans can borrow as much as $9,500 in their first year of study. But, again, subsidized loans can cover only $3,500 of that amount.

As each year of enrolment passes, the borrowing limit increases. In total, dependent students can borrow $23,000 in subsidized loans, accompanied by another $8,000 in unsubsidized loans. As a result, the aggregate limit on independent students’ loans is raised to $57,500, while subsidized students’ loans are limited to $23,000.

Graduate Students

The combined maximum direct loan amount for graduate and professional students, including their undergraduate borrowing, is $138,500, of which $65,500 is subsidized. Students in graduate and professional programs, however, have been restricted to unsubsidized loans since 2012.

First-Time Borrowers

You can receive direct subsidized loans for a limited number of academic years if you are a first-time borrower after July 1, 2013. There is a maximum eligibility period of 150% of the program’s published length. As a result, you can receive direct subsidized loans for no more than six years if you’re enrolled in a four-year degree program. Direct unsubsidized loans are not subject to such a limit.

Here are the limits for annual and aggregate subsidized and unsubsidized loans presented in a table to get a clearer picture!

Year	Dependent Students (except students whose parents are unable to obtain PLUS Loans)	Independent Students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)
First-Year Undergraduate	$5,500-No more than $3,500 of this amount may be in subsidized loans.	$9,500-No more than $3,500 of this amount may be in subsidized loans.
Second-Year Undergraduate	$6,500-No more than $4,500 of this amount may be in subsidized loans.	$10,500-No more than $4,500 of this amount may be in subsidized loans.
Third-Year And Beyond Undergraduate	$7,500 per year-No more than $5,500 of this amount may be in subsidized loans.	$12,500-No more than $5,500 of this amount may be in subsidized loans.
Graduate or Professional Student	Not Applicable (all graduate and professional degree students are considered independent).	$20,500 (unsubsidized only)
Subsidized and Unsubsidized Aggregate Loan Limit	$31,000-No more than $23,000 of this amount may be in subsidized loans.	$57,500 for undergraduates-No more than $23,000 of this amount may be in subsidized loans. $138,500 for graduate or professional students-No more than $65,500 of this amount may be in subsidized loans. The graduate aggregate limit includes all federal loans received for undergraduate study.

*A table of data on how much you can borrow in subsidized and unsubsidized loans

Interest rates on subsidized and unsubsidized loans

In general, federal loans have some of the lowest interest rates available, especially in comparison to private lenders, who may charge borrowers double-digit interest rates. 3.73% APR is applied to undergraduate students’ direct subsidized and unsubsidized loans disbursed after July 1, 2021, and before July 1, 2022.

Graduate and professional students can expect an APR of 5.28% for their unsubsidized loans. In addition, unlike some private loans, these rates don’t change over time, so they’re better than those of private loans.

Shown below are some student loan interest rate statistics:

Loan Type	2019-2020 Rate	2018-2019 Rate	2017-2018 Rate	2016-2017 Rate
Direct Subsidized Loans (Undergraduate)	4.53%	5.05%	4.45%	3.76%
Direct Unsubsidized Loans (Undergraduate)	4.53%	5.05%	4.45%	3.76%
Direct Unsubsidized Loans (Graduate)	6.08%	6.60%	6%	5.31%
Direct PLUS Loans (Graduate and Parents)	7.08%	7.60%	7%	6.31%

Another thing to note about interest: While the government pays the interest on direct subsidized loans during the first six months after you leave school, it’s your responsibility for the interest if you defer an unsubsidized loan or place it into forbearance.

Besides interest, all Direct Subsidized and Unsubsidized Loans have a loan fee. Each loan disbursement is deducted proportionately from the loan fee, a percentage of the loan amount. 

The percentage changes based on when the loan is first disbursed. On or after Oct.1, 2019, and before Oct. 1, 2020, the loan fee was 1.059%, and from Oct. 1, 2020, till Oct. 1, 2022, the fee reaches 1.057%

Repaying Subsidized and Unsubsidized Loans

The repayment process begins six months after graduation, leaving school, or dropping below half-time enrollment. Your loan servicer will provide you with repayment information during this period, and you will be notified when your first payment is due. Usually, payments are scheduled monthly. 

There is something called a maximum eligibility period. In general, the maximum eligibility period depends on the length of the program as published at the time. By contacting your school, you can usually find out how previous extended programs of study have been published.

Furthermore, borrowers can choose from a range of repayment plans tailored to their specific needs. To learn what options you have for repayment, talk to your loan servicer. Based on the repayment plan you choose, you usually have ten to twenty-five years to repay the loan.

The Standard Repayment Plan will automatically be enrolled on your account unless you request another option from your lender. With this plan, you will make equal payments each month over a maximum of ten years.

The following are some repayment options available:

• Graduated Repayment Plan

Your payments begin low and increase incrementally under the Graduated Repayment Plan. Similarly, the term of this plan is up to 10 years, but the payment structure will be different than the Standard option. For students with varying incomes, there are several income-based repayment plans available.

• Income-Based Repayment

The income-based repayment (IBR) option allows you to extend the repayment period up to 25 years. In addition, with income-driven plans, your monthly payment can be lowered. 

However, the longer it takes you to pay off the loans, the more interest you will pay in total. The forgiveness of some of your debt may result in taxable income if it is allowed by your plan.

Tax-deductible student loan interest is an upside. For example, you do not have to itemize in order to deduct interest paid on a qualified student loan of $2,500.

Your taxable income is reduced due to deductions, which may lower your tax bill or increase your refund. For student loan interest of more than $600 paid during the year, your loan servicer would issue you Form 1098-E, which you can use to file your taxes.

Getting a Loan: Know What Is Best For You

You must be enrolled at least half-time at a participating school to receive one of these loans. For example, a student generally must enroll at a school offering a degree or certificate program.

Are you looking for information about applying for a loan?

The Free Application for Federal Student Aid (FAFSA®) form must be completed and submitted before you can apply for a Direct Loan. In order to determine how much student aid you may qualify for, your school uses the information on your FAFSA form. Therefore, a direct loan will often be included in the package of financial aid you receive.

You will be informed by your school how to accept the loans included in your financial aid package.

When you apply for a Direct Loan for the first time, you will have to:

• You are required to complete entrance counseling so that you understand your dedication to repaying the loan;
• You must agree to the terms of the loan by signing a Master Promissory Note.

If you plan to attend a school that offers financial aid, ask about the process for receiving loans there.

Which Loan Do You Qualify For?

After looking at everything you need to know when taking out a student loan, you can finally decide the right option for you! These are the requirements you need to meet to take out one of the given loans:

• A minimum of half-time enrollment in a school that participates in the Federal Direct Loan program.
• Residents of the United States and eligible noncitizens.
• Social Security number in possession.
• Progression in academics that is satisfactory.
• The completion of high school or its equivalent.
• No default on any existing federal loans.
• Registration with the Selective Service System (for males ages 18- 25).

Both subsidized and unsubsidized direct loans can help individuals pay for college. However, whatever type of loan you choose, you will have to repay it eventually at an interest rate. Therefore, you should carefully consider how much you will need to borrow and which repayment option will work best for your budget.

Hopefully, this guide helped you give the right direction when it comes to affording a higher education!

Want to learn more about loans? Check out these articles:

• No Credit Check Loans: What to Know Before Getting One
• The Overuse of Student Loans and Biden Student Loans Extension
• Loans for Bad Credit: How to Get Them