Subsidized vs. Unsubsidized Student Loans

When it comes to borrowing money to pay for a college education, the federal government is the country’s biggest lender. The most popular type of aid is the Federal Direct (also known as Stafford) Loan Program. Both subsidized and unsubsidized loans are available for students attending the following post-secondary institutions:

Private or public colleges or universities
Community colleges
Technical or vocational schools
Trade or career programs

Applying for federal student aid can be a daunting process, especially if you’re unfamiliar with the terminology used to describe student loans. As you research the different types of loans issued by the U.S. Department of Education, you’ll undoubtedly come across the terms “subsidized” and “unsubsidized” loans. How do these types of loans compare, and which one is right for you? Understanding the differences between the two will help you make smart choices when you’re planning your funding strategy for college.

What is a Subsidized Loan?

Subsidized loans are financially supported by the federal government. The U.S. Department of Education helps low-income borrowers cover the cost of the loan by paying for the interest while you’re attending college (you must be enrolled at least half-time to qualify). If you need to apply for a deferment or a postponement of your loan payments, the government will cover the interest while the loan is deferred.

If you had a Direct Subsidized Loan that was scheduled to be paid out for the first time between July 2012 and July 2014, you must cover the cost of interest during the first six months after graduation – a time known as the “grace period.” If your loan was disbursed for the first time before 2012, the government will cover the cost of interest during the grace period.

Subsidized loans are based on financial needs and available only to undergraduate students. The school you attend will determine how much aid you receive based on the cost of your college-related expenses and the amount of funding that you’re receiving from other sources.

What is an Unsubsidized Loan?

Unlike subsidized loans, unsubsidized loans are not based on financial needs. Both undergraduates and graduates can apply for Direct Unsubsidized Loans. While the federal government backs unsubsidized loans, the government does not pay for interest at any time. The borrower is responsible for paying the interest throughout the life of the loan. While you’re attending school, or if your loan is in deferment, you have the option not to pay interest. However, the unpaid interest will be added to the principal or the final balance that you owe.