The difference between subsidized student loans and unsubsidized loans could save you thousands of dollars

From retirement saving to healthcare and other programs, the only way to get free money in this world is to understand the government programs that hand it out.

And few programs are as good a deal as the direct loan program with its subsidized and unsubsidized student loans.

The William D. Ford Federal Direct Loan Program (FDLP) is a special government student loan program to provide low-interest loans to students and parents. The U.S. Department of Education makes the loans rather than banks so there’s no profit motive to increase interest rates.

The program provides two types of loans, subsidized and unsubsidized, besides dishing out some of the lowest rates in lending.

The difference between these two types of loans could save you thousands of dollars.

What is a Subsidized Student Loan?

Subsidized student loans are a part of the direct loan program to pay the interest on student loans while you’re still in school and while the loan is in deferment. Loans typically remain in deferment, meaning you don’t have to make payments, for about six months after you graduate.

If you’re already out of school and paying on your student loans, you might want to look at refinancing to lower your rate. That’s what I did and was able to lower my average rate to less than 2.8% annually. Check SoFi to find your refinance rate.

There are limits and eligibility requirements for subsidized student loans. Eligibility for many types of subsidized loans are based on income. For example, Stafford loans are awarded to students whose family’s adjusted gross income is less than $50,000 a year.

Generally, you are only eligible to receive subsidized student loans for 150% of your published curriculum period. For example, if you are enrolled in a four-year degree program, you are only eligible for subsidized loans for six years.

What is a Federal Unsubsidized Student Loan?

Versus subsidized loans, unsubsidized student loans start accruing interest as soon as you get the loan. You still don’t have to start making payments until you graduate or leave school but the interest will start adding to your loan balance.

Unsubsidized student loans don’t have the time limit eligibility so if you are in school longer than 150% (1.5-times) your published curriculum period then you can still get loans. Unsubsidized loans generally don’t have income limits either so anyone can qualify for the government program.

How Much Subsidized and Unsubsidized Loans Can I Get?

There are limits to how much you can borrow in both subsidized and unsubsidized loans. For undergraduate students, you can borrow from $5,500 up to $12,500 per year in direct loans depending on your year in school and other factors.

This limit is a total amount for subsidized and unsubsidized loans. Since the amount you can borrow in subsidized loans is often tied to your income or your parents’ income, many students are not able to borrow the maximum in subsidized loans. In this case, you would borrow as much as possible in subsidized loans and make up the rest with unsubsidized loans.

Graduate students are allowed to borrow up to $20,500 in unsubsidized loans.

Remember, just because you are allowed to borrow the maximum doesn’t mean you should. Interest rates are lower on student loans, that’s the point of the federal program, and it can be tempting to take as much money as allowed. It can also lead to reckless spending and a huge debt burden after you graduate.

I made that very mistake, taking as much as I was allowed over five years of undergraduate studies and two years of graduate school. Twelve years later and I still have over $60,000 in student loans, about half of which was subsidized and half unsubsidized loans.

unsubsidized versus subsidized student loans
My subsidized and unsubsidized student loans

Fortunately, I was able to refinance my student loans at an excellent rate. Rates have increased but you can still get a good deal refinancing your student loans if you shop around.

Refinance your student loan on rates starting at 3.35% – Click to check your rate now

Interest Rate Difference Between Subsidized and Unsubsidized Loans

Besides the fact that the government covers your interest on subsidized loans while you’re in school, these direct loan programs are also great deals because the interest rate is much lower than traditional loans.

There’s usually no difference in rates between subsidized and unsubsidized loans though there is a difference in rates depending on the borrower.

Undergraduate loans are currently being offered at 4.45% for undergraduates and 6% for graduate students.

That’s a great interest rate considering you don’t need a credit check or cosigner to get a federal direct loan. Direct loans also come with automatic deferment, meaning you don’t make payments while in school and repayment plans are flexible when you do start paying.

How Do I Apply for Subsidized or Unsubsidized Student Loans?

Getting any direct loans from the federal government start with filling out a FAFSA loan application. Yours or your parents’ income will be taken into consideration to determine how much you may borrow.

  1. Fill out a FAFSA application by visiting, the form for the following school year is available October of the prior year with the deadline usually June 30th
    1. You’ll first create an FSA ID to login
    2. You’ll need your social security number, your parents’ social security numbers if they claim you as a dependent on their taxes, your driver’s license or an Alien Registration number. You’ll also need tax returns for you and your spouse or from your parents’ if they claim you on their taxes.
  2. Even if you are not expecting to take out any student loans, it’s still a good idea to fill out the FAFSA. Many schools use the information to determine school aid eligibility.
  3. After your FAFSA information is shared with your school, you will be notified about eligibility and for how much in direct loans you qualify.

I see a lot of people question the high cost of a degree, especially the cost of student loans many people use to pay for school. While the value of a degree from some of the for-profit schools is questionable, a degree from a state or private college is immeasurably valuable.

Get the information you need and understand your options, like the difference between subsidized student loans and unsubsidized loans. Both can be good options to pay for school but one can save you thousands in interest and make it easier to pay back your loans.

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