Is it time to start repaying your student loans? Or maybe you’re considering borrowing funds to cover pay for your education? Either way, it’s worth the effort to learn how subsidized and unsubsidized loans work as their unique terms impact how much you’ll pay in interest over the life of the loan.

student in library

What are subsidized student loans?

Subsidized student loans are offered by the federal government to assist college students that have an unmet financial need. The amount you qualify for will be calculated by the school, but it must be equal to or less than the actual amount of your financial need.

One of the most notable perks of subsidized student loans is how interest accrues. You’ll only be responsible for paying interest if your enrollment drops below part-time or once you’ve been out of school for over six months.

Otherwise, the U.S. Department of Education will cover interest payments for you. Your interest payments will also be covered if you’re approved for a deferment.

What are unsubsidized student loans?

Unlike subsidized student loans, unsubsidized loans are also available to undergraduate, graduate, and professional students to help offset the costs of higher education.

In addition, you don’t have to demonstrate unmet financial need to qualify. Instead, the amount you qualify for is calculated by subtracting any other financial aid you’ll receive from your cost of attendance.

You’ll also be responsible for covering interest on your student loans, regardless of your enrollment status. This means that even if loan payments are deferred, in forbearance or under a grace period, the interest will continue to accumulate and be added to the outstanding balance, or principal, of your student loan.

What are the qualification criteria?

To qualify for a subsidized or unsubsidized loan from the federal government, you must meet the following criteria:

  • Be a U.S. citizen, permanent resident, or national
  • Be enrolled at least part-time in a qualifying school and be working towards a degree or certificate. (The school must also be a participant in the Direct Loan Program).
  • Demonstrate financial need (if you’re an undergraduate student seeking a Direct Unsubsidized Loan).

Are there loan limits?

For starters, the amount you qualify for may vary from the annual loan limit. This depends primarily on your status as a student and what year of study you are in. The annual loan limits are as follows:


Year of Study

Dependent Students

Independent Students

Year 1 (undergraduate)

$5,500 (subsidized loans limited to $3,500)

$9,500 (subsidized loans limited to $3,500)

Year 2 (undergraduate)

$6,500 (subsidized loans limited to $4,500)

$10,500 (subsidized loans limited to $4,500)

Year 3 and beyond (undergraduate)

$7,500 (subsidized loans limited to $5,500)

$12,500 (subsidized loans limited to $5,500)

Graduate or Professional Student

This classification is not applicable for graduate or professional students).

$20,500 (subsidized loans not permitted)

Aggregate Loan Limit

Undergraduate students:
$31,000 (subsidized loans limited to $23,000)

Graduate or Professional Students:
Not applicable






**These figures vary for dependent students with parents that do not qualify for PLUS loans.
Undergraduate students:
$57,500 (subsidized loans limited to $23,000)

Graduate or Professional Students:
$138,500 (subsidized loans limited to $65,500)
*This amount includes the aggregate amount of federal loans used towards undergraduate studies.

**These figures also apply to dependent students with parents that do not qualify for PLUS loans.

What are the current interest rates and fees?

If you’re an undergraduate student, you’ll be assessed an interest rate of 4.45 percent for any Direct Subsidized or Unsubsidized loans disbursed between before July 1, 2018. For Graduate or Professional students, the interest rate on Direct Unsubsidized Loans is 6 percent.

You should also be mindful of the loan fee, which is 1.066 percent on loans disbursed between October 1, 2017, and September 31, 2018.

Which one is best?

Although they both have similar terms, Direct Subsidized Loans are hands down the better option because they allow you to avoid interest while you’re in school or during periods when the loan is deferred.

If you’re a graduate or professional student, Direct Subsidized Loans are not be an option. But it still may be in your best interest to take advantage of Direct Unsubsidized Loans in lieu of private loans.

Why so? Well, despite interest being capitalized even when the loans are in a grace period or deferment, the rate still trumps what you’d qualify for through a private lender.

How do I apply?

You’ll need to complete a Free Application for Federal Student Aid (FAFSA), which can be found here. Once it’s received by the school, they’ll use the information provided to compile a financial aid package (if you’re eligible).The financial aid office will then update you on the status of your application.

How do I receive loan proceeds?

The financial aid office will send additional information on how to accept your loan offers. Note that it is mandatory for first-time loan recipients to review and sign a Master Promissory Note that legally binds you to the loan.

You may also be required to attend entrance counseling, which is offered in person or online, depending on your school.

Once the loans are disbursed, they will be applied to your outstanding balance, which includes tuition and fees, room and board, and any other school-related expenses. The balance that remains will then be distributed to you and should be used for expenses related to your education.

What if I don’t want the entire amount?

You have the option to reject the loan offer when it’s presented or only accept a portion of the funds. If you’ve already received the loan proceeds but no longer wish to participate in the loan program, refer to your promissory note or contact the financial aid office for guidance on what to do next.

How much time do I have to pay the loan off?

Most loan terms span 10 to 25 years. When it’s time to start repaying your loans, the loan servicer will contact you with more information. At that time, you can discuss the possibility of enrolling in a payment plan that best suits your needs.

Also, keep in mind that you may qualify for loan cancellation, discharge, or forgiveness at a later date.

Other loan options

Are you having trouble qualifying for federal aid because you’ve met your borrowing limit or fail to meet some other qualification criteria? Private student loans are an option.

As mentioned earlier, the interest rates are a bit steep, compared to those of Direct Loans. Plus, private lenders will perform a credit check during the application process, and proof of income may be required.

But with a cosigner, you may qualify for more favorable loan terms. Furthermore, you have the option of refinancing the loan(s) once you’ve completed your education and secured steady employment.

Reputable private student loan providers include Credible, SoFi, CommonBond, and Discover. Check out this comprehensive list for more alternatives.

You can also explore PLUS loans, which are offered by the federal government to parents to help their children offset the cost of tuition, fees, and other related expenses.

Bottom Line

Subsidized loans have more favorable loan terms because of the way interest accrues, which makes them the better choice for undergraduate students.

Unfortunately, graduate and professional students don’t qualify. But unsubsidized loans still offer an array of benefits, including lower interest rates and flexible repayment plans, that private loans don’t, which makes them a more viable alternative.

Prior to accepting any loan offers, be sure to read the fine print so you know what you’re signing up for. Otherwise, there could be harsh financial consequences later on down the line.