Difference between Subsidized and Unsubsidized Loans

Understanding the difference between subsidized and unsubsidized loans can save you hundreds in interest payments. While both are federal student loans, only one is interest free while you’re in school.

Read on below to find out the difference between subsidized and unsubsidized student loans.

Subsidized Loans

Subsidized loans are more advantageous for students than unsubsidized loans. Since the U.S. Department of Education pays the interest on a subsidized loan, you don’t have to worry about your loan growing while in school.

Additionally, subsidized loan interest payments don’t begin until after the grace period, generally the first six months after you leave school. Furthermore, interest does not accrue on a subsidized student loan during deferment. After these periods, you are responsible to pay the subsidized loan interest.

Especially relevant is the fact that as of July 1, 2012, subsidized loans are only available to undergraduate students with financial need. This means that graduate students are not eligible to receive subsidized loans.

Unsubsidized Loans

Both undergraduate and graduate students of any financial situation are eligible for unsubsidized loans. As the borrower of an unsubsidized loan, you are responsible for paying the interest at all times. Interest accrues from the day you take out an unsubsidized loan.

While unsubsidized loans are not based on your financial needs, your school determines the amount of your loan based on tuition and other financial aid that you receive.

Subsidized vs Unsubsidized Loans

As you can see, subsidized loans are advantageous for eligible students; however, unsubsidized and subsidized loan limits do exist.

Annual Loan LimitSubsidizedTotal Unsubsidized + Subsidized
Undergrad Year 1$3,500$5,500$9,500
Undergrad Year 2$4,500$6,500$10,500
Undergrad Year 3+$5,500$7,500$12,500
Graduate Years$0$0$20,500 (unsubsidized)
Maximum Lifetime$23,000$31,000$57,500 (undergraduate)
$138,500 (graduate)

If eligible, it probably makes sense for you to take maximal advantage of a subsidized loan. As long as the interest rate is better than that of a private student loan, you should also take full advantage of an unsubsidized loan.

Although you don’t technically have to make payment on an unsubsidized loan until after you graduate, you should pay the interest every month. In doing so, your loan won’t accrue interest and compound, and you’ll have a predictable loan amount when you graduate.

Craving more financial topics? Check out some of my other finance blog posts here. Also, let me know if you have any questions about subsidized vs unsubsidized loans in the comments below.

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